As filed with the Securities and Exchange Commission on September 2, 2004

Registration No. 333-116657

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Amendment No. 2

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

(832) 375-2505

(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

(832) 375-2505

(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. ¨

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 SEPTEMBER 2, 2004.

PROSPECTUS

Shares

Woodforest Financial Group, Inc.

LOGO

Common Stock

This is an initial public offering by Woodforest Financial Group, Inc. of shares of 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 have applied 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.

Joint Lead Manager

KEEFE, BRUYETTE & WOODS

SUNTRUST ROBINSON HUMPHREY

SANDERS MORRIS HARRIS

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		15
Use of Proceeds		16
Our Policy Regarding Dividends		17
Capitalization		18
Dilution		20
Price Range of Our Common Stock		21
Business		22
Delta Card Spin-Off		28
Selected Historical Consolidated Financial Data		29
Pro Forma Selected 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		78
Compensation of Executive Officers and Directors		83
Beneficial Stock Ownership by Principal Shareholders and Management		89
Supervision and Regulation		90
Description of Our Capital Stock		98
Shares Eligible for Future Sale		102
Underwriting		105
Legal Matters		108
Experts		108
Where You Can Find More Information		108
Index to Consolidated 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.

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 144 locations throughout Texas as of June 30, 2004, 28 of which are traditional branches and 116 of which are “in-store” branches. As of June 30, 2004, we had $1.5 billion in total assets, $923.6 million in total loans, $1.3 billion in total deposits and $78.3 million in total shareholders’ equity. Based on total assets as of June 30, 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 14.0% in assets, 15.3% in loans and 12.0% in deposits. We have also grown our earnings 29.1% in that same time period. Our pre-tax return on average assets for the six months ended June 30, 2004 was 1.76%, and our pre-tax return on equity was 33.32% for that same period. While achieving this growth, we have maintained our high credit quality.

On a pro forma basis after giving effect to this offering and the transactions described in “Developments Affecting Our Business After the Offering” on page 5, for the six months ended June 30, 2004, our return on average assets would have been 1.07% and our return on average equity would have been 20.22% for the same period.

Business

We conduct our financial services business from both traditional branch bank offices located in our primary market of Montgomery and Harris Counties and branches located in stores operated by large retail chains in our primary market, other major market areas in Texas (the Dallas-Fort Worth, San Antonio and Austin metroplexes) and in several pockets in East and West Texas.

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 church and medical facilities, which, as of June 30, 2004, constituted 18.5% of our total loan

portfolio. As of June 30, 2004, commercial and industrial, commercial real estate and construction and land development loans constituted 76.3% of our total loan portfolio.

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 116 in-store branches as of June 30, 2004, including 55 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. While our in-store branches are not primarily designed to be large deposit gatherers, they enable us to receive high customer visibility and generate new accounts, which helps us 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, our low cost deposits 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 account 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 business and consumer customers with a wide range of products and conveniences.

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 was the sixth fastest growing county in the United States among counties with populations of 250,000 or more. We make the majority of our loans in Montgomery County where, as of June 30, 2003, we held a 19% deposit market share. 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. According to 2000 census data, 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. Our 28 traditional branches are located in Montgomery and Harris Counties, both of which are densely populated. Of our 116 in-store branches as of June 30, 2004, 45 are located in our primary market. The remaining in-store branches include three branches in counties near our primary market, 40 branches in the Dallas-Fort Worth area, 15 branches in the Austin-San Antonio region, ten branches in East Texas and three branches in West Texas.

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 eight in-store locations in Texas during the third and fourth quarters of 2004 and 15 to 20 in-store locations in Texas in 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 three traditional branches during the remainder of 2004 and five to eight traditional branches in 2005, which could include areas other than Houston.

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 27.2% of our total revenue for the six months ended June 30, 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 161.1% from $415.6 million to $1.1 billion. These low cost deposits represented 90.3% of our total deposits at June 30, 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 June 30, 2004, our ratio of nonperforming assets to total loans and other real estate was 0.85% and our net charge-offs to average loans was 0.17%.

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 (832) 375-2505. 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.

DEVELOPMENTS AFFECTING OUR BUSINESS AFTER THE OFFERING

Immediately prior to the completion of this offering, we intend to take the following significant corporate actions which will affect our financial condition and results of operations after the offering:

Declare a cash distribution of approximately $23.0 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 (largely to pay the taxes on the Subchapter S corporation earnings), 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 make a cash distribution of accumulated earnings to our existing shareholders. Our final determination of the amount of the cash distribution will be based on the amount of net proceeds projected to be raised in this offering. The projected net proceeds are based on management’s estimate of the amount needed to increase our capital accounts following the cash distribution and the spin-off of Delta Card discussed below and to support our projected growth;

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. In 2001, we acquired Delta Card, a merchant payment processing service that provides electronic credit verification for businesses that accept major credit and debit cards. The spin-off will be taxable to us as if Delta Card had been sold for its fair market value, and any gain will flow through to our existing shareholders due to our Subchapter S corporation status. In addition, the spin-off will be treated as a distribution of property to our existing shareholders, and as a result, is expected to be tax-free to us and Delta Card. See “Delta Card Spin-Off.” For the years ended December 31, 2003, 2002 and 2001, Delta Card generated pre-tax earnings for us of $2.5 million, $1.7 million and $1.1 million, respectively. After the spin-off, we will no longer receive these net earnings. On a pro forma basis giving effect only to the spin-off of Delta Card, our net earnings would have decreased by $1.4 million to $11.0 million for the six months ended June 30, 2004 and by $2.5 million to $21.5 million for the year ended December 31, 2003. In addition, our total assets would have decreased by $41.8 million to $1.4 billion as of June 30, 2004 and our total shareholders’ equity would have decreased by $41.4 million to $37.0 million; and

Voluntarily terminate our status as a Subchapter S corporation and convert to a “C” corporation for federal income tax purposes. As a Subchapter S corporation, our earnings were not subject to federal income tax at the corporate level but were passed through to our shareholders, who incurred federal income tax liability for a portion of our earnings proportionate to their percentage of common stock ownership. Accordingly, we have not paid any federal income tax on our earnings since 1997. As a “C” corporation, we will be subject to federal income tax at the corporate level at an estimated effective rate of 33.0%, and any dividends paid to our shareholders will be subject to federal income tax at each shareholder’s individual federal income tax rate.

We do not intend to proceed with the cash distribution, Delta Card spin-off or conversion to a “C” corporation unless and until we and the underwriters have agreed on the offering price.

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 Consolidated Financial Data.”

THE OFFERING

Common stock offered ⁽¹⁾

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

Use of proceeds

The principal reasons for conducting the offering at this time are to raise capital to increase our capital accounts following a cash distribution to our existing shareholders and the spin-off of Delta Card to our shareholders as of a record date prior to completion of the offering, to create a public market for our common stock and to facilitate future access to capital markets. Of the net proceeds we will receive from the offering, we intend to use approximately $23.0 million to make a cash distribution to our existing shareholders and approximately $32.0 million to increase our capital accounts following the spin-off of Delta Card. We expect to use any remainder of the net proceeds, as well as the $32.0 million used to increase our capital accounts following the spin-off of Delta Card, 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 have applied 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:

1,394,276 shares that we may issue upon the exercise of stock options outstanding as of June 30, 2004 at a weighted average exercise price of $11.27 per share (prior to adjustment of exercise prices for the Delta Card spin-off); and

1,185,000 shares that we may issue under our 2004 stock incentive plan approved by our shareholders in June 2004 and 8,000 shares that we may issue under our 1995 incentive stock option and nonstatutory stock option plan.

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, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” beginning on page 38 and “Unaudited Pro Forma Consolidated Financial Information” beginning on page 33. 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 June 30, 2004 and 2003 and for the six-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 distributing accumulated and undistributed earnings to our existing shareholders, the spin-off of Delta Card, our conversion from a Subchapter S corporation to a “C” corporation for federal income tax purposes and the offering on our historical financial position and results of operations. The cash distribution, the spin-off of Delta Card and the conversion to a “C” corporation will not be effected unless and until we and the underwriters have agreed on the offering price. 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 of Delta Card 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 Six Months Ended June 30,		Pro Forma for the Year Ended December 31,		As of and for the Six Months Ended June 30,				As of and for the Years Ended December 31,
	2004(1)		2003(1)		2004		2003		2003		2002		2001
	(Unaudited)				(Unaudited)
	(in thousands, except per share, branch and account data)
Income Statement Data:
Interest income	$	31,949	$	64,451	$	31,949	$	32,254	$	64,451	$	67,669	$	71,846
Interest expense		9,155		18,964		9,155		10,173		18,964		24,763		36,719

Net interest income		22,794		45,487		22,794		22,081		45,487		42,906		35,127
Provision for loan losses		1,420		2,945		1,420		1,595		2,945		3,250		2,200

Net interest income after provision for loan losses		21,374		42,542		21,374		20,486		42,542		39,656		32,927
Gains on sales of securities, net		560		2,873		560		2,389		2,873		4,234		5,449
Other noninterest income		29,066		48,377		71,045		58,601		124,272		104,815		81,216

Total noninterest income		29,626		51,250		71,605		60,990		127,145		109,049		86,665
Noninterest expense		39,951		72,264		80,525		69,264		145,666		125,958		104,570

Income before income taxes		11,049		21,528		12.454		12,212		24,021		22,747		15,022
Income tax expense		3,646		7,104		—		—		—		—		—

Net earnings	$	7,403	$	14,424	$	12,454	$	12,212	$	24,021	$	22,747	$	15,022

Common Share Data(2):
Basic earnings per share	$	0.41	$	0.80	$	0.89	$	0.87	$	1.71	$	1.63	$	1.07
Diluted earnings per share		0.40		0.78		0.87		0.86		1.69		1.62		1.07
Book value per share		3.83				5.56		5.35		5.48		5.43		4.39
Tangible book value per share(3)		3.24				2.38		2.23		2.19		2.43		1.14


	Pro Forma as of and for the Six Months Ended June 30, 2004(1)			Pro Forma for the Year Ended December 31, 2003(1)			As of and for the Six Months Ended June 30,						As of and for the Years Ended December 31,
				Pro Forma for the Year Ended December 31, 2003(1)			2004			2003			2003			2002			2001
	(Unaudited)						(Unaudited)
	(in thousands, except per share, branch and account data)
Balance Sheet Data (at period end):
Total assets	$	1,444,633					$	1,454,109		$	1,356,757		$	1,353,273		$	1,281,375		$	1,218,635
Securities		283,986						283,986			255,239			221,342			268,712			284,303
Loans (including loans held for sale)		923,567						923,567			826,475			866,459			793,951			688,315
Allowance for loan losses		(10,769	)					(10,769	)		(9,717	)		(10,096	)		(8,957	)		(7,090	)
Total deposits		1,279,298						1,279,298			1,200,853			1,177,156			1,129,154			1,082,362
Borrowings and note payable		90,835						90,835			75,820			91,205			71,620			69,410
Total shareholders’ equity		69,249						78,332			75,082			76,915			76,278			60,600

Selected Financial Ratios and Other Data:
Performance Ratios and Other Data:
Return on average assets		1.07	%					1.76	%		1.88	%		1.83	%		1.81	%		1.35	%
Return on average equity		20.22						33.32			32.13			32.08			31.47			24.07
Net interest margin		3.83			4.07	%		3.83			3.99			4.07			3.99			3.65

Fee income per deposit account(4)	$	256.93		$	231.31		$	256.93			N/A	(9)	$	231.31		$	211.54		$	161.79
Noninterest income to total revenue(5)		56.05	%		51.54	%		75.71	%		72.63	%		73.20	%		70.95	%		69.81	%

Core deposits to total deposits		90.32	%					90.32	%		91.42	%		92.19	%		86.30	%		86.13	%
Loans to deposits		72.19						72.19			68.82			73.61			70.31			63.59
Average investment securities to average earning assets		19.29						19.29			22.48			21.96			25.16			23.40

Asset Quality Ratios(6):
Nonperforming assets to total loans and other real estate		0.85	%					0.85	%		0.70	%		1.32	%		1.16	%		0.71	%
Net charge-offs to average loans		0.17						0.17			0.21			0.22			0.19			0.13
Allowance for loan losses to total loans		1.17						1.17			1.18			1.17			1.13			1.03
Allowance for loan losses to nonperforming loans(7)		276.62						276.62			216.03			154.97			110.38			179.09

Capital Ratios(8):
Leverage ratio								6.26	%		5.55	%		5.88	%		5.79	%		4.36	%
Average shareholders’ equity to average total assets								5.27			5.85			5.69			5.74			5.63
Tier 1 risk-based capital ratio								8.26			7.90			7.80			8.43			6.62
Total risk-based capital ratio								11.05			10.51			11.16			11.08			10.23

Branch Locations (Unaudited):
Traditional		28			26			28			25			26			25			24
In-store		116			102			116			90			102			85			64

Total		144			128			144			115			128			110			88

Number of deposit accounts		184,704			155,390			184,704			144,215			155,390			132,636			104,637

Average deposit accounts		170,594			144,013			170,594			N/A	(9)		144,013			118,637			88,718

(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)	Calculated by dividing service charges on deposit accounts by average deposit accounts, excluding time deposits. Information for the six months ended June 30, 2004 has been annualized.

(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)	Average number of accounts for the six months ended June 30, 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

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 75.8% of our loan portfolio as of June 30, 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.

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. If market interest rates should move contrary to our position, this “gap” will work against us, and our earnings may be negatively affected. Based on our one-year cumulative interest rate gap at June 30, 2004 of $86.9 million, an increase in the general interest rates may positively affect our net yield on interest-earning assets since our interest-earning assets reprice faster than our interest-bearing liabilities. 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.

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 in-store operations. As of June 30, 2004, we operated 116 in-store branches, 96 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. For instance, our master sublease agreement with Wal-Mart, which grants us a five-year lease in each store in which we maintain a branch, provides that each lease is renewable for two consecutive five-year terms at our option, provided that we have conducted our operations in an efficient, high-class and reputable manner and are not in default under the lease. Wal-Mart may terminate the master sublease if a store is damaged by fire or other casualty. Additionally, the closure of any of these lessor or licensor stores, for financial reasons or otherwise, or a decline in the growth of new stores could adversely affect our financial condition, results of operations and growth. 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 operations 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 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.

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. While we are not currently aware of any fact or circumstance that would cause our allowance to be inadequate, 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.

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.

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 the outstanding 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 have applied 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 currently do not anticipate declaring or paying any cash dividends on our common stock in the foreseeable future following this offering. 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.

For a foreseeable period of time, our principal source of funds to pay dividends on our common stock will be cash dividends that we receive from Woodforest National Bank with respect to its capital stock. The payment of dividends by Woodforest National Bank to us is subject to certain restrictions 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition—Capital Resources” and “Supervision and Regulation—Woodforest National Bank.”

In addition, we have issued an aggregate of $46.4 million in junior subordinated debentures to our five 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 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, 1,394,276 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.

The principal reasons for conducting the offering at this time are to raise capital to increase our capital accounts following a cash distribution and the spin-off of Delta Card to our shareholders as of a record date prior to completion of the offering, to create a public market for our common stock and to facilitate future access to capital markets.

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

approximately $23.0 million to increase our capital accounts following the cash distribution to our existing shareholders of accumulated and undistributed earnings on which they have been or will be subject to federal income tax;

approximately $32.0 million to increase our capital accounts following the spin-off of Delta Card; and

any remainder, which includes the $32.0 million to increase our capital accounts following the spin-off of Delta Card, for general corporate purposes, including investments in earning assets, the opening of additional traditional and in-store branches and for possible acquisitions of financial institutions.

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 dividends in the future.

For a foreseeable period of time, the principal source of our cash revenues to pay dividends on our common stock will be the cash dividends that we receive from Woodforest National Bank with respect to its capital stock. The payment of dividends by Woodforest National Bank to us is subject to certain restrictions 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 June 30, 2004:

on an actual basis; and

on a pro forma basis as adjusted to give effect to:

the proposed distribution to our existing shareholders of 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 assumed issuance of shares of our common stock offered by this prospectus, assuming the underwriters’ 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 proposed cash distribution, spin-off of Delta Card and conversion from a Subchapter S corporation to a “C” corporation will not be effected unless and until we and the underwriters have agreed on the offering price.

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.


	June 30, 2004
	Actual			Pro forma As Adjusted for the Offering
	(dollars in thousands)
	(unaudited)
Indebtedness:
Federal Home Loan Bank advances	$	10,000		$	10,000
Note payable		33,064			33,064
Subordinated debentures due 2004 through 2006		550			550
Subordinated debentures due 2006		827			827
Junior subordinated debentures		46,394			46,394

Total indebtedness	$	90,835		$	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 14,080,210 shares outstanding; shares issued and shares outstanding, as adjusted		14,291
Additional paid-in capital		7,881
Retained earnings		62,488
Accumulated other comprehensive loss		(4,223	)
Less treasury stock (at cost)		(2,105	)

Total shareholders’ equity	$	78,332

Total capitalization	$	169,167

Consolidated capital ratios:
Average equity to average total assets		5.27	%
Tier 1 risk-based capital ratio		8.26
Total risk-based capital ratio		11.05
Leverage ratio		6.26

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 net tangible book value as of June 30, 2004 was $33.5 million, or $2.38 per share of our common stock. Net tangible book value per share represents the difference between total assets, less intangible assets and goodwill, and total liabilities, divided by the 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 net tangible book value per share of our common stock immediately after the offering. After giving effect to:

the cash distribution, the spin-off of Delta Card and the conversion to a “C” corporation; and

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 June 30, 2004 would have been $ million, or $ per share. This represents an immediate increase in 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)		$
Net tangible book value per share at June 30, 2004
Increase in net tangible book value per share attributable to new investors
Pro forma net tangible book value per share after the offering, the cash distribution, the spin-off and the “C” corporation conversion
Dilution per share to new investors		$

The following table compares, as of June 30, 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

275,147

1,197,561

4.35

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 June 30, 2004, including:

If all options outstanding as of June 30, 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 $ .

PRICE RANGE OF OUR COMMON STOCK

There is currently no public trading market for our common stock and historically there has been limited trading in our common stock. While trades in our common stock may be privately conducted between a buyer and a seller, the majority involve purchases of shares by our KSOP plan from various individuals. These purchases may represent the only transactions in our common stock during a given quarter. We conduct an independent third party appraisal of our common stock on a quarterly basis. Our KSOP plan will only purchase our common stock at the then-appraised value. Further, all of the trades since January 1, 2002, including those between third parties, have been made at the then-appraised value. These trading prices may not be indicative of the offering price or future sales prices. As of June 30, 2004, there were approximately 59 holders of record of our common stock.

While we have applied for quotation of our common stock on the Nasdaq National Market, we cannot assure you that an active public market will develop or be sustained after the offering.

The following table sets forth the high and low sales prices of our common stock of which management is aware for the periods indicated:


	High		Low
Calendar Year Ending December 31, 2004

First Quarter Second Quarter Third Quarter (through August 31, 2004)	$	13.20 13.50 —		13.20 13.50 —

Calendar Year Ended December 31, 2003

First Quarter Second Quarter Third Quarter Fourth Quarter	$	12.00 — 12.30 12.50	$	12.00 — 12.30 12.50

Calendar Year Ended December 31, 2002

First Quarter Second Quarter Third Quarter Fourth Quarter	$	10.25 11.25 11.75 11.75	$	10.25 11.25 11.75 11.75

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 144 locations in Texas as of June 30, 2004, 28 of which are traditional branches and 116 of which are “in-store” branches. As of June 30, 2004, we had $1.5 billion in total assets, $923.6 million in total loans, $1.3 billion in total deposits and $78.3 million in total shareholders’ equity. Based on total assets as of June 30, 2004, we are the fourth largest independent commercial banking organization headquartered in the greater Houston area.

History

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 and other areas in Texas.

Business

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

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.

“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 19.4% of our common stock as of August 31, 2004. 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

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 was the sixth fastest growing county in the United States among counties with populations of 250,000 or more. We make the majority of our loans in Montgomery County where, as of June 30, 2003, we held a 19% deposit market share. 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. According to 2000 census data, 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 116 in-store branches as of June 30, 2004, 45 are located in our primary market. The remaining in-store branches include three branches in counties near our primary market, 40 branches in the Dallas-Fort Worth area, 15 branches in the Austin-San Antonio region, ten 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.

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 144 branches as of June 30, 2004, 87.5% have been opened since 1999. Our focus on opening new branches will continue through the third and fourth quarters of 2004, with the planned opening of 11 branches, including three new traditional branches and eight new in-store branches.


	As of and For the Six Months Ended June 30, 2004			As of and For the Years Ended December 31,															Compound Annual Growth Rate
	As of and For the Six Months Ended June 30, 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		14			17			21	(1)		44			11			2		N.M.		N.M.

Total		16			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		109			95			78			57			13			2		21.8	%	162.5	%

Total		126			110			92			70			24			12		19.6	%	74.0	%

Percentage of total branches		87.5	%		85.9	%		83.6	%		79.5	%		57.1	%		40.0	%	N.M.		N.M.

Total service charges on deposit accounts (in thousands)	$	21,796		$	33,311		$	25,096		$	14,354		$	8,615		$	6,471		32.7	%	50.6	%
Number of deposit accounts		184,704			155,390			132,636			104,637			72,798			54,813		17.2	%	29.8	%
Average deposit accounts		170,594			144,013			118,637			88,718			63,806			41,943		N.M.		N.M.
Revenue per deposit account (average accounts) (2)	$	256.93	(3)	$	231.31		$	211.54		$	161.79		$	135.02		$	154.28		9.3	%	10.7	%

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

(2)	Calculated by dividing service charges on deposit accounts by average deposit accounts, excluding time deposits.

(3)	Annualized.

N.M.—Not meaningful.

Strategies

Our principal growth opportunities and operating strategies are the following:

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 June 30, 2004, we had $103.4 million in commercial business loans, which represented 11.2% 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 June 30, 2004, we had $334.9 million in commercial mortgage loans, which represented 36.3% 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 $98.7 million at June 30, 2004, which represented 10.7% of our total loans.

Construction/Land Development. We also make loans to finance the construction of residential and nonresidential properties. At June 30, 2004, we had $266.3 million in construction loans, which represented 28.8% of our total loans. Approximately $75.4 million in construction loans were loans to local builders and individuals to finance residential construction. Approximately $127.9 million of the construction loans were to finance residential lots and land for development into residential lots to individuals and local builders. Approximately $41.8 million in construction loans were to finance multi-family, hotel, motel, retail, office, industrial and other projects. The remainder of the construction loans of $21.2 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 June 30, 2004, we had $65.7 million in SBA and student loans, which represented 7.1% 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 June 30, 2004, we had $19.4 million in consumer loans, which represented 2.1% of our total loans.

Additional Services

We recently launched “Tu Banco,” our full-service bilingual banking center targeting the 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. Woodforest Financial Services provides certain of these investment services pursuant to an agreement between Woodforest National Bank and Raymond James Financial Services, Inc. Raymond James is expected to purchase shares from the underwriters and sell them to our officers, directors, employees and other persons associated with us who express an interest in purchasing shares of our common stock that have been reserved for them by the underwriters. See “Underwriting.”

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 June 30, 2004, we had 1,207 full-time equivalent employees, 80 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

As of June 30, 2004, we conduct business at our 144 banking locations, 28 of which are traditional branches and 116 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 as of June 30, 2004:


Region		Number of Branches
Houston/The Woodlands		28 Traditional 48 In-store
Dallas-Fort Worth		40 In-store
San Antonio-Austin		15 In-store
East Texas		10 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 for our in-store branches as of June 30, 2004 expire as follows:


Expiration Dates		Number of Branches
2004-2010		2 locations
2011-2015		18 locations
2016-2020		96 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, for federal income tax purposes 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. The spin-off of Delta Card will be accounted for at book value for financial reporting purposes. Accordingly, no gain or loss will be recorded in the statement of earnings related to the spin-off. The book value of Delta Card will be determined based on its stand-alone financial statements at the date of the spin-off, which is anticipated to be approximately $41.4 million. In addition, we do not expect to record any impairment related to the Delta Card spin-off based on our last annual impairment test, performed in the third quarter of 2003, in which the fair value of Delta Card’s net assets exceeded its book value. Because there have been no events since the last impairment test which in management’s belief would suggest that any impairment may have occurred, no subsequent impairment analysis has been performed. Because the Delta Card spin-off will be taxable to our shareholders, a valuation of Delta Card will be performed immediately prior to the spin-off. Any impairment resulting from the book value of the net assets exceeding their fair value at the time of the spin-off, although not anticipated, will be recorded on our books at that time.

As shown in the Unaudited Pro Forma Consolidated Financial Information beginning on page 33, Delta Card will no longer be our subsidiary as a result of the spin-off, 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 of $2.5 million, $1.7 million and $1.1 million, respectively. After the spin-off, we will no longer receive these net earnings. However, the operating agreement in existence between Delta Card and us will remain in effect and pursuant to this agreement, and after the spin-off, we will continue to receive income from Delta Card for the bank settlement services we provide. 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 addition to the effect on our net earnings, the spin-off will reduce our assets by approximately $41.8 million.

In connection with the spin-off of Delta Card, we intend to modify the outstanding options that we have granted to acquire shares of our common stock. To compensate our option holders for the Delta Card spin-off, we intend to issue one option to acquire common stock in Delta Card for each option previously held to acquire shares of our common stock. The option price for our existing options will be reallocated on a pro rata basis to both the options to acquire our common stock and to the options to acquire Delta Card common stock so that the ratio of exercise price per share to the market value per share remains the same immediately before and immediately after the spin-off. In addition, the aggregate intrinsic value of options to acquire our common stock and the options to acquire Delta Card common stock will remain the same. Accordingly, there will be no change in the accounting treatment of our outstanding options.

At June 30, 2004, there are 1,394,276 options to acquire shares of our common stock outstanding at a weighted average exercise price of $11.27. While the modification of our outstanding options as described above does not trigger a change in our results of operations, the adjusted exercise price will be used in the calculation of our pro forma diluted earnings per share.

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 June 30, 2004 and 2003 and for the six-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 Six Months Ended June 30,						As of and for the Years Ended December 31,
	2004			2003			2003			2002			2001			2000			1999
	(in thousands, except per share, branch and account data)
Income Statement Data:
Interest income	$	31,949		$	32,254		$	64,451		$	67,669		$	71,846		$	57,723		$	43,321
Interest expense		9,155			10,173			18,964			24,763			36,719			29,479			19,168

Net interest income		22,794			22,081			45,487			42,906			35,127			28,244			24,153
Provision for loan losses		1,420			1,595			2,945			3,250			2,200			2,690			1,150

Net interest income after provision for loan losses		21,374			20,486			42,542			39,656			32,927			25,554			23,003
Gains on sales of securities, net		560			2,389			2,873			4,234			5,449			114			77
Other noninterest income		71,045			58,601			124,272			104,815			81,216			17,234			17,675

Total noninterest income		71,605			60,990			127,145			109,049			86,665			17,348			17,752
Noninterest expense		80,525			69,264			145,666			125,958			104,570			31,741			24,052

Net earnings	$	12,454		$	12,212		$	24,021		$	22,747		$	15,022		$	11,161		$	16,703

Common Share Data(1):
Basic earnings per share	$	0.89		$	0.87		$	1.71		$	1.63		$	1.07		$	0.85		$	1.31
Diluted earnings per share		0.87			0.86			1.69			1.62			1.07			0.85			1.30
Book value per share		5.56			5.35			5.48			5.43			4.39			3.34			2.75
Tangible book value per share(2)		2.38			2.23			2.19			2.43			1.14			2.23			1.62
Cash dividends declared per share		0.47			0.52			1.04	(3)		0.93			0.51			0.43			0.76
Cash dividend payout ratio		53.0	%		59.8	%		60.8	%		57.2	%		47.6	%		50.5	%		57.9	%

Weighted average shares outstanding (basic)		14,050			14,042			14,042			13,980			14,026			13,107			12,716
Weighted average shares outstanding (diluted)		14,282			14,176			14,190			14,067			14,068			13,204			12,891
Shares outstanding at end of period		14,080			14,042			14,042			14,042			13,801			13,097			13,218

Balance Sheet Data (at period end):
Total assets	$	1,454,109		$	1,356,757		$	1,353,273		$	1,281,375		$	1,218,635		$	914,000		$	660,867
Securities		283,986			255,239			221,342			268,712			284,303			185,588			181,375
Loans (including loans held for sale)		923,567			826,475			866,459			793,951			688,315			564,761			387,682
Allowance for loan losses		(10,769	)		(9,717	)		(10,096	)		(8,957	)		(7,090	)		(5,682	)		(3,462	)
Total deposits		1,279,298			1,200,853			1,177,156			1,129,154			1,082,362			837,130			605,740
Borrowings and note payable		90,835			75,820			91,205			71,620			69,410			28,941			16,483
Total shareholders’ equity		78,332			75,082			76,915			76,278			60,600			43,809			36,336


	As of and for the Six Months Ended June 30,					As of and for the Years Ended December 31,
	2004			2003		2003			2002			2001			2000			1999
	(in thousands, except per share, branch and account data)

Selected Financial Ratios and Other Data:
Performance Ratios and Other Data:
Return on average assets		1.76	%	1.88	%		1.83	%		1.81	%		1.35	%		1.43	%		2.69	%
Return on average equity		33.32		32.13			32.08			31.47			24.07			27.74			50.56
Net interest margin		3.83		3.99			4.07			3.99			3.65			4.00			4.32
Efficiency ratio(4)		85.81		85.85			85.81			85.27			89.88			69.79			57.50

Fee income per deposit account(5)	$	256.93		N/A	(10)	$	231.31		$	211.54		$	161.79		$	135.02		$	154.28
Noninterest income to total revenue(6)		75.71	%	72.63	%		73.20	%		70.95	%		69.81	%		37.90	%		33.15	%

Asset Quality Ratios(7):
Nonperforming assets to total loans and other real estate		0.85	%	0.70	%		1.32	%		1.16	%		0.71	%		0.31	%		0.44	%
Net charge-offs to average loans		0.17		0.21			0.22			0.19			0.13			0.10			0.09
Allowance for loan losses to total loans		1.17		1.18			1.17			1.13			1.03			1.01			0.89
Allowance for loan losses to nonperforming loans(8)		276.62		216.03			154.97			110.38			179.09			744.69			350.05

Capital Ratios(9):
Leverage ratio		6.26	%	5.55	%		5.88	%		5.79	%		4.36	%		6.34	%		5.56	%
Average shareholders’ equity to average total assets		5.27		5.85			5.69			5.74			5.63			5.14			5.32
Tier 1 risk-based capital ratio		8.26		7.90			7.80			8.43			6.62			9.31			8.70
Total risk-based capital ratio		11.05		10.51			11.16			11.08			10.23			11.57			10.96

Branch Locations (Unaudited):
Traditional		28		25			26			25			24			22			21
In-store		116		90			102			85			64			20			9

Total		144		115			128			110			88			42			30

Number of deposit accounts		184,704		144,21	5		155,390			132,636			104,637			72,798			54,813

Average deposit accounts		170,594		N/A	(10)		144,013			118,637			88,718			63,806			41,943

(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)	Calculated by dividing service charges on deposit accounts by average deposit accounts, excluding time deposits. Information for the six months ended June 30, 2004 has been annualized.

(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)	Average number of accounts for the six months ended June 30, 2003 is not available.

PRO FORMA SELECTED CONSOLIDATED FINANCIAL DATA

The following selected pro forma consolidated financial data for the periods and at the dates indicated should be read in conjunction with our audited consolidated financial statements, including the notes thereto, and “Unaudited Pro Forma Consolidated Financial Information” beginning on page 33. The pro forma selected consolidated financial data is presented to show the impact of the distribution of 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, the additional taxes to be incurred upon our conversion from a Subchapter S corporation to a “C” corporation and the offering on our historical financial position and results of operations. The pro forma consolidated balance sheet data assumes that the spin-off, the cash distribution, the conversion to a “C” corporation and this offering were consummated at June 30, 2004. 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 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.


	Pro Forma As of and for the Six Months Ended June 30, 2004(1)		Pro Forma For the Six Months Ended June 30, 2003(1)		Pro Forma For the Year Ended December 31, 2003(1)
					Pro Forma For the Year Ended December 31, 2003(1)
	(in thousands, except per share, branch and account data)
Income Statement Data:
Interest income	$	31,949	$	32,254	$	64,451
Interest expense		9,155		10,173		18,964

Net interest income		22,794		22,081		45,487
Provision for loan losses		1,420		1,595		2,945

Net interest income after provision for loan losses		21,374		20,486		42,542
Gains on sale of securities, net		560		2,389		2,873
Other noninterest income		29,066		22,788		48,377

Total noninterest income		29,626		25,177		51,250
Noninterest expense		39,951		34,571		72,264

Income before taxes		11,049		11,092		21,528
Provision for income taxes		3,646		3,660		7,104

Net earnings	$	7,403	$	7,432	$	14,424

Common Share Data:
Basic earnings per share	$	0.41	$	0.41	$	0.80
Diluted earnings per share		0.40		0.40		0.78
Book value per share		3.83
Tangible book value per share(2)		3.24
Cash dividends declared per share		0.37		0.28		0.86	(3)

Weighted average shares outstanding (basic)(4)		18,050		18,042		18,042
Weighted average shares outstanding (diluted)(4)		18,537		18,390		18,440
Shares outstanding at end of period(4)		18,080		18,042		18,042


	Pro Forma As of and for the Six Months Ended June 30, 2004(1)			Pro Forma For the Six Months Ended June 30, 2003(1)		Pro Forma For the Year Ended December 31, 2003(1)
						Pro Forma For the Year Ended December 31, 2003(1)
	(in thousands, except per share, branch and account data)

Balance Sheet Data (at period end):
Total assets	$	1,444,633
Securities		283,986
Loans (including loans held for sale)		923,567
Allowance for loan losses		(10,769	)
Total deposits		1,279,298
Borrowings and note payable		90,835
Total shareholders’ equity		69,249

Selected Financial Ratios and Data:
Performance Ratios and Other Data:
Return on average assets		1.07	%
Return on average equity		20.22
Net interest margin		3.83		3.99	%		4.07	%
Efficiency ratio(5)		77.04		77.05			76.99

Fee income per deposit account(6)	$	256.93		N/A	(10)	$	231.31
Noninterest income to total revenue(7)		56.05	%	50.79	%		51.54	%

Asset Quality Ratios(8):
Nonperforming assets to total loans and other real estate		0.85	%
Net charge-offs to average loans		0.17
Allowance for loan losses to total loans		1.17
Allowance for loan losses to nonperforming loans(9)		276.62

Branch Locations (Unaudited):
Traditional		28		25			26
In-store		116		90			102

Total		144		115			128

Number of deposit accounts		184,704		144,214			155,390
Average deposit accounts		170,594		N/A	(10)		144,013

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

(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)	The number of weighted average shares outstanding has been adjusted to reflect the assumed issuance of 4,000,000 shares of our common stock in this offering.

(5)	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).

(6)	Calculated by dividing service charges on deposit accounts by average deposit accounts, excluding time deposits. Information for the six months ended June 30, 2004 has been annualized.

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

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

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

(10)	Average number of accounts for the six months ended June 30, 2003 is not available.

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma consolidated financial information as of June 30, 2004 and for the six months ended June 30, 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 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.

The Unaudited Pro Forma Consolidated Balance Sheet reflects our historical position as of June 30, 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 as of June 30, 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. However, the proposed cash distribution, spin-off of Delta Card and conversion to a “C” corporation will not be effected unless and until we and the underwriters agree on the offering price. The adjustments are based on information available and certain assumptions that we believe are reasonable.

In connection with the spin-off of Delta Card, we intend to modify the outstanding options that we have granted to acquire shares of our common stock. To compensate the option holders for the Delta Card spin-off, we intend to issue one option to acquire common stock in Delta Card for each option previously held to acquire shares of our common stock. The option price for our existing options will be reallocated on a pro rata basis to both the options to acquire our common stock and to the options to acquire Delta Card common stock so that the ratio of exercise price per share to the market value per share remains the same immediately before and immediately after the spin-off. In addition, the aggregate intrinsic value of options to acquire our common stock and the options to acquire Delta Card common stock will remain the same. Accordingly, there will be no change in the accounting treatment of our outstanding options.

At June 30, 2004, there are 1,394,276 options to acquire shares of our common stock outstanding at a weighted average exercise price of $11.27. The modification of our outstanding options as described above does not trigger a change in our results of operations. However, the adjusted option price will be used in determining the number of diluted shares for purposes of calculating our diluted earnings per share as further described in note (f) on page 37.

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 June 30, 2004


				Pro Forma Adjustments
	Woodforest Historical			Spin-off Transaction(a)			Cash Distribution and “C” Corporation Conversion			Initial Public Offering(e)		Woodforest Pro Forma
	(dollars in thousands)
Assets:
Cash and due from banks	$	85,347		$	(1,322	)	$	(23,000	)(b)	$	55,000	$	116,025

Federal funds sold		13,740											13,740
Time deposits in other financial institutions		658											658

Investment securities, held to maturity		10,155											10,155
Investment securities, available for sale		273,831											273,831

		283,986			—			—			—		283,986

Loans, net of unearned discount		923,567											923,567
Less allowance for loan losses		(10,769	)										(10,769	)

		912,798			—			—			—		912,798

Net interest earning assets		1,211,182			—			—			—		1,211,182

Bank premises and equipment, net		65,236			(2,300	)							62,936
Bank owned life insurance		22,848											22,848
Accrued interest receivable		7,141											7,141
Intangible assets, net		26,570			(17,551	)							9,019
Goodwill		18,220			(16,534	)							1,686
Other real estate owned		3,992											3,992
Other assets		13,573			(4,065	)		296	(d)				9,804

		157,580			(40,450	)		296			—		117,426

Total assets	$	1,454,109		$	(41,772	)	$	(22,704	)	$	55,000	$	1,444,633

Liabilities and Shareholders’ Equity:
Liabilities:
Deposits		1,279,298											1,279,298
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		1,804											1,804
Accounts payable and other liabilities		3,840			(393	)							3,447
Deferred income taxes payable		—						—					—

Total liabilities		1,375,777			(393	)		—			—		1,375,384

Shareholders’ equity:
Common stock		14,291									4,000		18,291
Additional paid-in capital		7,881			(41,074	)					51,000		17,807
Retained earnings		62,488			(305	)		(23,000	)(b)				38,001
								(1,182	)(d)
Unrealized gain/loss on securities available for sale		(4,223	)					1,478	(d)				(2,745	)
Treasury stock (at cost)		(2,105	)										(2,105	)

Total shareholders’ equity		78,332			(41,379	)		(22,704	)		55,000		69,249

Total liabilities and shareholders’ equity	$	1,454,109		$	(41,772	)	$	(22,704	)	$	55,000	$	1,444,633

Unaudited Pro Forma Consolidated Statement of Earnings

For the Six Months Ended June 30, 2004


			Pro Forma Adjustments
	Woodforest Historical		Spin-off Transaction(a)			Cash Distribution and “C” Corporation Conversion			Woodforest Pro Forma
	(dollars in thousands, except per share data)
Interest Income:
Loans	$	28,873	$			$			$	28,873
Investment securities		2,739								2,739
Federal funds sold		315								315
Time deposits in other financial institutions		22								22

Total interest income		31,949		—			—			31,949
Interest Expense:
Deposits		6,970								6,970
FHLB advances		110								110
Note payable		489								489
Debentures		25								25
Interest on TruPS		1,558								1,558
Federal funds purchased		3								3

Total interest expense		9,155		—			—			9,155

Net interest income		22,794								22,794
Provision for loan losses		1,420								1,420

Net interest income after provision for loan losses		21,374		—			—			21,374
Noninterest Income:
Service charges on deposit accounts		21,796								21,796
Other service charges and fees		3,764								3,764
Merchant income—Delta Card		41,979		(41,979	)					—
Merchant income—Bank		3,032								3,032
Gain on sales of loans		465								465
Gain on sale of investment securities		560								560
Other		9								9

Total noninterest income		71,605		(41,979	)					29,626
Noninterest Expense:
Salaries and employee benefits		28,716		(7,480	)					21,236
Net occupancy		4,063		(209	)					3,854
Furniture and equipment		3,046		(179	)					2,867
Data processing fees—Bank		2,014		—						2,014
Supplies		997		(114	)					883
Telephone		1,463		(151	)					1,312
Postage		680		(66	)					614
Professional fees		955		(17	)					938
Merchant processing and interchange fees		26,517		(26,517	)					—
Security		233		—						233
Amortization of intangible assets		1,367		(758	)					609
Other		10,474		(5,083	)					5,391

Total noninterest expense		80,525		(40,574	)		—			39,951

Earnings before income tax expense		12,454		(1,405	)		—			11,049
Income tax expense—current period		—		—			(3,646	)(c)		(3,646	)

Net earnings	$	12,454	$	(1,405	)	$	(3,646	)	$	7,403

Earnings per common share:
Basic	$	0.89							$	0.41
Diluted		0.87								0.40
Weighted average shares outstanding:
Basic		14,050								18,050	(f)
Diluted		14,282								18,537	(f)

Unaudited Pro Forma Consolidated Statement of Earnings

For the Year Ended December 31, 2003


			Pro Forma Adjustments
	Woodforest Historical		Spin-off Transaction(a)			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	)					—
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	)					36,778
Net occupancy		7,813		(352	)					7,461
Furniture and equipment		6,143		(287	)					5,856
Data processing fees—Bank		3,331		—						3,331
Supplies		2,180		(314	)					1,866
Telephone		3,031		(313	)					2,718
Postage		1,260		(27	)					1,233
Professional fees		1,180		(54	)					1,126
Merchant processing and interchange fees		46,934		(46,934	)					—
Security		467		—						467
Amortization of intangible assets		2,694		(1,516	)					1,178
Other		20,074		(9,824	)					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	)(c)		(7,104	)

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

Earnings per common share:
Basic	$	1.71							$	0.80
Diluted		1.69								0.78
Weighted average shares outstanding:
Basic		14,042								18,042	(f)
Diluted		14,190								18,440	(f)

Notes to Unaudited Pro Forma Consolidated Financial Statements

(a)

This adjustment represents the spin-off of our Delta Card subsidiary at its book value, based on the stand-alone financial statements of Delta Card. We do not expect to record any impairment related to the Delta Card spin-off based on our last annual impairment test, performed in the third quarter of 2003, in which the fair value of Delta Card’s net assets exceeded its book value. Because there have been no events since the last impairment test which in management’s belief would suggest that any impairment may have occurred, no subsequent impairment analysis has been performed. Because the Delta Card spin-off will be taxable to our shareholders, a valuation of Delta Card will be performed immediately prior to the spin-off. Any impairment resulting from the book value of the net assets exceeding their fair value at the time of the spin-off, although not anticipated, will be recorded on our books at that time.

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

(c)	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.

(d)	This adjustment represents the net deferred tax asset incurred upon our conversion from a Subchapter S corporation to a “C” corporation. The total deferred tax asset of $296,000 consists of the following:


Deferred tax assets:
Reserve for loan losses	$	3,769
Other		129
Tax effect on unrealized loss on securities available-for-sale		1,478

Total deferred tax assets		5,376

Deferred tax liabilities:
Depreciation—fixed assets		(2,678	)
Other		(96	)
Cash to accrual adjustment		(2,306	)

Total deferred tax liabilities		(5,080	)

Net deferred tax asset	$	296

(e)

This adjustment represents the assumed issuance of 4,000,000 shares of our common stock in this offering, assuming the underwriters’ over-allotment is not exercised, at an assumed offering price of $15.00 per share and after deducting the underwriting discounts and commissions and other offering expenses, for an estimated net price of $13.75 per share. The assumed number of shares and assumed offering price has been included solely for the purpose of preparing the pro forma consolidated financial statements.

(f)

For the year ended December 31, 2003, weighted average basic and diluted shares outstanding represent 14,042,000 and 14,190,000 weighted average shares basic and diluted, respectively, plus the additional incremental shares that would have a dilutive effect based on the reduction in option exercise price attributable to the spin-off of Delta Card and the proposed issuance of 4,000,000 shares of our common stock in this offering at an assumed offering price of $15.00 per share. The reduction in option exercise price attributable to the spin-off of Delta Card is based on a pro rata allocation of the option exercise price among the outstanding options to acquire our common stock and the options to acquire Delta Card common stock to be issued in connection with the spin-off, using the assumed market value per share of the entity issuing the option. The assumed market value for our common stock is the assumed offering price of $15.00 per share and the assumed market value for the Delta Card common stock is $2.85 per share, resulting in an assumed weighted average option exercise price of $ 9.21 for our common stock. Accordingly, the number of incremental diluted shares attributable to the Delta Card spin-off would be 250,000 shares, calculated using the treasury stock method.

For the six months ended June 30, 2004, weighted average basic and diluted shares outstanding represent 14,050,000 and 14,282,000 weighted average shares basic and diluted, respectively, plus the additional incremental shares that would have a dilutive effect based on the reduction in option exercise price attributable to the spin-off of Delta Card and the proposed issuance of 4,000,000 shares of our common stock in this offering at an assumed offering price of $15.00 per share. Using the same assumed market values as in the preceding paragraph, the weighted average option exercise price of our common stock is assumed to be $9.47. Accordingly, the number of incremental diluted shares attributable to the Delta Card spin-off calculated using the treasury stock method, would be 255,000 shares.

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 six months ended June 30, 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 $23.0 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.

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 accumulated and undistributed earnings to our existing shareholders, the spin-off of Delta Card to our existing shareholders, the conversion to a “C” corporation and this offering 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 multiple 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. We measure total revenue as net interest income plus other noninterest income, excluding securities gains. Net interest income represented 26.8% 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 23.8% 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 44.4% 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, these realized gains 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.

Realized gains on the sale of loans is another source of revenue for us. The types of loans that we typically sell are Small Business Administration (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 52 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 Six Months Ended June 30, 2004 and 2003

Overview

Net income for the six months ended June 30, 2004 was $12.5 million compared with $12.2 million for the six months ended June 30, 2003, an increase of 2.0%. Diluted earnings per share were $0.87 for the six months ended June 30, 2004 compared with $0.86 for the six months ended June 30, 2003, an increase of $0.01 or 1.2%. The increase in net income was primarily due to the increase in revenue per deposit account and new account growth, which were attributable to new products and services implemented in late 2003, partially offset by a decrease in securities gains of $1.8 million. We posted pre-tax returns on average assets of 1.76% and 1.88% for the six months ended June 30, 2004 and 2003, respectively. Our pre-tax returns on average equity were 33.32% and 32.13% for the six months ended June 30, 2004 and 2003, respectively.

Total assets increased $97.4 million or 7.2% to $1.5 billion at June 30, 2004, from $1.4 billion at June 30, 2003 primarily due to growth in loans. Both deposits and borrowings funded the growth in earning assets. Deposits increased $78.4 million or 6.5% to $1.3 billion at June 30, 2004 compared with June 30, 2003. Demand, interest checking, money market and savings account balances increased $31.1 million or 3.7% at June 30, 2004 compared with June 30, 2003 and certificates of deposit increased $47.3 million or 13.0%.

Total assets increased $100.8 million or 7.5% at June 30, 2004 compared with December 31, 2003 primarily due to growth in loans. Deposits at June 30, 2004 increased $102.1 million or 8.7% from their level at December 31, 2003 while borrowings decreased by $1.8 million.

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 six months ended June 30, 2004 was $22.8 million, an increase of 3.2% from $22.1 million for the six months ended June 30, 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 7.2% to $1.2 billion for the six months ended June 30, 2004 compared with $1.1 billion for the six months ended June 30, 2003. Over the same time period, our loan portfolio increased 11.7% while our investment securities portfolio increased by 11.3%. 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 3.83% for the six months ended June 30, 2004 from 3.99% 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 5.38% for the six months ended June 30, 2004, a decrease from 5.83% for the six months ended June 30, 2003. For the six months ended June 30, 2004, the yield on average loans was 6.44%, down from 7.02% for the six months ended June 30, 2003, while the yield on average securities decreased from 3.04% for the six months ended June 30, 2003 to 2.39% 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 Six Months Ended June 30,
	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	$	901,043	$	28,873	6.44	%	$	806,989	$	28,104	7.02	%
Investment securities		230,590		2,739	2.39			250,553		3,773	3.04
Time deposits in other financial institutions		1,791		22	2.47			3,774		52	2.78
Federal funds sold		61,961		315	1.02			53,451		325	1.23

Total interest-earning assets		1,195,385		31,949	5.38			1,114,767		32,254	5.83

Less allowance for loan losses		10,518						9,403

Total interest-earning assets, net of allowance		1,184,867						1,105,364
Noninterest-earning assets		241,871						204,013

Total assets	$	1,426,738					$	1,309,377

Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
Interest-bearing deposits	$	950,417	$	6,970	1.47	%	$	892,008	$	8,216	1.86	%
FHLB advances		10,000		110	2.21			—		—	—
Note payable		33,064		489	2.97			36,264		619	3.44
Subordinated debentures		1,965		25	2.56			6,494		26	0.81
Federal funds purchased		341		3	1.77			—		—	—
Company obligated mandatorily redeemable trust preferred securities of subsidiary trusts		—		—	—			31,563		1,312	8.38
Junior subordinated debentures		46,394		1,558	6.75			—		—	—

Total interest-bearing liabilities		1,042,181		9,155	1.77			966,329		10,173	2.12

Noninterest-bearing liabilities:
Demand deposits		302,312						261,837
Accrued interest payable		1,863						3,021
Other liabilities		5,209						1,544

Total liabilities		1,351,565						1,232,731
Shareholders’ equity		75,173						76,646

Total liabilities and shareholders’ equity	$	1,426,738					$	1,309,377

Net interest income			$	22,794					$	22,081

Net interest spread					3.61	%					3.71	%

Net interest margin					3.83	%					3.99	%

(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 Six Months Ended June 30, 2004 compared with the Six Months Ended June 30, 2003
	Increase (Decrease) Due to Change in
	Volume			Rate			Total
	(dollars in thousands)
Interest-earning assets:
Loans	$	3,276		$	(2,507	)	$	769
Securities		(301	)		(733	)		(1,034	)
Federal funds sold		52			(62	)		(10	)
Time deposits in other financial institutions		(27	)		(3	)		(30	)

Total increase (decrease) in interest income		3,000			(3,305	)		(305	)

Interest-bearing liabilities:
Interest-bearing deposits	$	538		$	(1,784	)	$	(1,246	)
Note payable		(55	)		(75	)		(130	)
Junior subordinated debentures		616			(370	)		246
Other borrowings		23			89			112

Total increase (decrease) in interest expense		1,122			(2,140	)		(1,018	)

Increase (decrease) in net interest income	$	1,878		$	(1,165	)	$	713

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 six months ended June 30, 2004 was $1.4 million compared with $1.6 million for the six months ended June 30, 2003. The decrease in the provision was driven by a decrease in charge-offs in the loan portfolio.

Noninterest Income

Noninterest income for the six months ended June 30, 2004 was $71.6 million, an increase of 17.4% from $61.0 million for the six months ended June 30, 2003. This increase was partially offset by a $1.8 million decrease in the gain on sales of securities. Service charges on deposit accounts for the six months ended June 30, 2004 were $21.8 million, an increase of 38.5% from $15.7 million compared with the same period in 2003. Other service charges and fees increased 6.5% while merchant income increased 18.3% for the six months ended June 30, 2004 compared with the same period in 2003.

Included in noninterest income are gains recognized on the sale of loans. Gains on the sale of loans for the six months ended June 30, 2004 were $465,000 compared with $710,000 for the six months ended June 30, 2003. Loans sold during both periods consisted of the guaranteed portion of SBA loans and pools of student loans. Outstanding loan balances in the amount of $5,895,000 and $15,495,000 were sold in the six months ended June 30, 2004 and 2003, respectively.

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


	For the Six Months Ended June 30,
	2004		2003
	(dollars in thousands)

Service charges on deposit accounts	$	21,796	$	15,732
Other service charges and fees		3,773		3,534

Subtotal		25,569		19,266
Merchant income—bank		3,032		2,812
Gain on sale of loans		465		710
Gain on sale of investment securities		560		2,389

Subtotal		29,626		25,177
Merchant income—Delta Card		41,979		35,813

Total noninterest income	$	71,605	$	60,990

The largest increase between the comparative periods was a $6.2 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.

Noninterest Expense

Noninterest expense for the six months ended June 30, 2004 was $80.5 million, an increase of 16.3% compared with $69.3 million for the six months ended June 30, 2003. At June 30, 2003, we had 115 branch locations while at June 30, 2004 we had increased to 144 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.

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


	For the Six Months Ended June 30,
	2004		2003
	(dollars in thousands)

Noninterest expense—excluding Delta Card:
Salaries and employee benefits	$	21,236	$	17,558
Non-staff expenses:
Premises and equipment		6,721		6,414
Bank data processing expense		2,014		1,538
Telephone		1,312		1,284
Postage		614		605
Professional fees		938		482
Amortization of intangible assets		609		587
Other noninterest expense		6,507		6,103

Total non-staff expenses excluding Delta Card		18,715		17,013

Total noninterest expense excluding Delta Card		39,951		34,571

Noninterest expense—Delta Card:
Salaries and employee benefits		7,480		6,393
Merchant processing and interchange		26,517		22,425
Other noninterest expense		6,577		5,875

Total noninterest expense—Delta Card		40,574		34,693

Total noninterest expense	$	80,525	$	69,264

Salaries and employee benefits expense increased 19.9% to $28.7 million for the six months ended June 30, 2004 compared with $24.0 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 increased from $45.3 million for the six months ended June 30, 2003 to $51.8 million for the same period in 2004. This 14.3% increase in non-staff expenses principally resulted from the increased number of branch locations in 2004 compared with 2003.

Excluding Delta Card, salaries and employee benefits expense increased 20.9% to $21.2 million for the six months ended June 30, 2004 compared with $17.6 million for 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 $17.0 million for the six months ended June 30, 2003 to $18.7 million for the same period in 2004. This 10.0% 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’s merchant processing and interchange expenses totaled $26.5 million for the six months ended June 30, 2004 versus $22.4 million during the same period in 2003. The 18.2% 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 11.9% to $6.6 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 85.81% at June 30, 2004, a slight decrease from 85.85% at June 30, 2003.

Income Taxes

We elected Subchapter S filing status for the fiscal year commencing January 1, 1998. Accordingly, 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 our estimated effective tax rate of 33.0% for the six months ended June 30, 2004 and 2003, our federal income tax expense would have been $4.1 million and $4.0 million, respectively. This pro forma income tax amount is considered a non-GAAP financial measure as defined under the rules and regulations of the Securities and Exchange Commission. Management believes that this presentation of the estimated federal income tax we would have paid as a “C” corporation should enhance the investors’ understanding of the impact of our conversion to a “C” corporation.

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 $1.4 million for the six months ended June 30, 2004 and $1.3 million for the same period in 2003.

Financial Condition

Loan Portfolio

Total loans increased $97.1 million or 11.7% from $826.5 million at June 30, 2003 to $923.6 million at June 30, 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 June 30, 2004					As of June 30, 2003
	Amount			Percent		Amount			Percent
	(dollars in thousands)

Commercial and industrial	$	103,384		11.2	%	$	101,424		12.3	%
Real estate:
Commercial real estate		334,912		36.3			271,782		32.9
Consumer mortgage		98,662		10.7			82,668		10.0
Construction and land development		266,287		28.8			270,371		32.7
Consumer		19,434		2.1			27,733		3.4
Student		16,888		1.8			8,262		1.0
SBA		48,805		5.3			26,496		3.2
Obligations of state/political		24,097		2.6			31,786		3.8
Other		11,098		1.2			5,953		0.7

Total loans		923,567		100.0	%		826,475		100.0	%
Allowance for loan losses		(10,769	)				(9,717	)

Net loans	$	912,798				$	816,758

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. In order to mitigate these risks and better serve our customers, we seek to gain an understanding of the business of each customer and the reliability of their cash flow, so that we can place appropriate value on collateral taken and structure the loan to maintain collateral values at appropriate levels. In analyzing credit risk, we generally focus on the business experience of our borrowers’ management. We also rely on the experience of our bankers and their relationships with our customers to enhance our understanding of the borrower and its business. Our lines of credit typically are limited to a percentage of the value of the assets securing the line. Our term loans are typically also secured by the assets of the borrower’s business. Commercial borrowers are required to provide updated personal and corporate financial statements annually. At June 30, 2004, we had $103.4 million in commercial loans, which represented 11.2% 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 June 30, 2004, we had $334.9 million in commercial real estate loans, which represented 36.3% 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 require an appraisal of the mortgaged property that includes a market data analysis based on recent sales of comparable homes in the area and a replacement cost analysis. 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 require flood insurance. In addition, we 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 June 30, 2004, we had $98.7 million in consumer mortgage loans, which represented 10.7% 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. In order to mitigate these risks, we monitor the status of each construction loan and the underlying project throughout its term. In addition, in order to identify what we believe to be acceptable levels of risks in construction lending, we evaluate the percentage of completion and compare it to the amount of funds remaining to complete the project.

At June 30, 2004, we had $266.3 million in construction/land development loans, which represented 28.8% of our total loans. Approximately $75.4 million in construction loans were loans to local builders and individuals to finance residential construction. Approximately $127.9 million of the remaining construction loans were loans to finance residential lots and land for development into residential lots to individuals and local builders. Approximately $41.8 million in construction loans were to finance multi-family, hotel, motel, retail, office, industrial and other projects. The remainder of the construction loans of $21.2 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. While we have the ability to hold these loans to maturity, we often sell these loans in the secondary market at a premium. At June 30, 2004, we had $65.7 million in SBA and student loans, which represented 7.1% 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. We examine the personal liquidity of our consumer borrowers, and in some instances require the borrower to maintain a minimum level of liquidity in order to mitigate the risks of nonpayment. 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 June 30, 2004, we had $19.4 million in consumer loans, which represented 2.1% 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. Generally, our underwriting guidelines are designed to help us evaluate a borrower’s credit history and capacity to repay the loan and the value and adequacy of the collateral that will secure the loan. 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 $18.7 million per relationship as of June 30, 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 June 30, 2004:


	As of June 30, 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	$	38,690	$	29,269	$	23,901	$	6,364	$	5,160	$	103,384
Real estate:
Commercial real estate		36,195		101,202		119,524		13,165		64,825		334,912
Consumer mortgage		7,048		34,452		2,199		46,898		8,065		98,662
Construction and land development		94,127		87,711		59,679		10,625		14,144		266,287
Consumer		4,899		12,939		783		813		—		19,434
Student		—		—		—		—		16,888		16,888
SBA loans		2,689		—		2,684		1,330		42,102		48,805
Obligations of state/political		—		19,739		—		4,358		—		24,097
Other		10,709		389		—		—		—		11,098

Total loans	$	194,357	$	285,702	$	208,770	$	83,554	$	151,184	$	923,567

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 June 30, 2004 and 2003:


	As of June 30, 2004				As of June 30, 2003
	Loans Outstanding		% of Total Loans		Loans Outstanding		% of Total Loans
	(dollars in thousands)

Religious organizations	$	81,809	8.9	%	$	73,482	8.9	%
Medical industry		88,535	9.6			53,354	6.5

Our loan type concentrations are centered on loans secured by various types of real estate. As of June 30, 2004, loans collateralized by real estate accounted for 75.8% 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 $7.9 million at June 30, 2004 compared with $5.8 million at June 30, 2003, reflecting our continued strong asset quality. The increase was primarily due to an increase of $2.9 million in other real estate owned related primarily to the foreclosure of an approximately $2.2 million condominium complex. Our ratio of nonperforming assets to total loans and other real estate owned was 0.85% at June 30, 2004 and 0.70% at June 30, 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 have recently enhanced and centralized our procedures for the early identification and continued monitoring of potential problem loans.

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 June 30, 2004			As of June 30, 2003
	(dollars in thousands)

Nonaccrual loans	$	3,788		$	3,856
Accruing loans past due 90 days or more		105			642
Restructured loans		—			—
Repossessed assets		21			193
Other real estate owned		3,992			1,104

Total nonperforming assets	$	7,906		$	5,795

Nonperforming assets to total loans and other real estate		0.85	%		0.70	%

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 June 30, 2004 and 2003, loans totaling $11.3 million and $10.2 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 monthly basis. Interest on nonperforming loans that would have been accrued under the original loan agreements was $147,722 and $170,247 at June 30, 2004 and 2003, respectively.

Net charge-offs were $747,000 for the six months ended June 30, 2004 compared with $835,000 for the same period in 2003, which contributed to the decrease in the provision for loan losses. As a percentage of average loans, these net charge-offs were 0.17% as of June 30, 2004 and 0.21% as of June 30, 2003. The allowance for loan losses at June 30, 2004 was $10.8 million, or 1.17% of total loans compared with $9.7 million at June 30, 2003, or 1.18% 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 Six Months Ended June 30, 2004			As of and for the Six Months Ended June 30, 2003
	(dollars in thousands)

Total loans at end of period	$	923,567		$	826,475

Average loans outstanding	$	901,043		$	806,989

Allowance at beginning of period	$	10,096		$	8,957
Provision for loan losses		1,420			1,595
Charge-offs:
Commercial and industrial		(243	)		(362	)
Real estate—mortgage		(136	)		(521	)
Real estate—construction		(487	)		—
Consumer and other		(89	)		(16	)

Total charge-offs		(955	)		(899	)
Recoveries:
Commercial and industrial		9			36
Real estate—mortgage		70			27
Real estate—construction		90			—
Consumer and other		39			1

Total recoveries		208			64

Net charge-offs		(747	)		(835	)


Allowance for loan losses at end of period	$	10,769		$	9,717

Ratio of allowance for loan losses to end of period loans		1.17	%		1.18	%
Ratio of net charge-offs to average loans outstanding		0.17	%		0.21	%
Ratio of allowance for loan losses to nonperforming loans		276.62	%		216.03	%

Our allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. The allowance for loan losses is comprised of three components: specific reserves, general reserves and unallocated reserves. Generally, all loans that have been identified as impaired are reviewed on a monthly basis in order to determine whether a specific allowance is required. A loan is considered impaired when, based on current information, it is probable that we will not receive all amounts due in accordance with the contractual terms of the loan agreement. Once a loan has been identified as impaired, management measures impairment in accordance with Statement of Financial Accounting Standards No. 114, “Accounting By Creditors for Impairment of a Loan,” as amended by Statement of Financial Accounting Standards No. 118, “Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures.” When management’s measured value of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve. These specific reserves are determined on an individual loan basis based on management’s current evaluation of our loss exposure for each credit, given the payment status, financial condition of the borrower and value of any underlying collateral. Loans for which specific reserves are provided are excluded from the general reserve and unallocated allowance calculations described below. Changes in specific reserves from period to period are the result of changes in the circumstances of individual loans such as charge-offs, pay-offs, changes in collateral values or other factors.

The allowance for loan losses represents management’s estimate of the amount necessary to provide for known and inherent losses in the loan portfolio in the normal course of business. Due to the uncertainty of risks in the loan portfolio, management’s judgment of the amount of the allowance necessary to absorb loan losses is approximate. The allowance for loan losses is also subject to regulatory examinations and determination by the regulatory agencies as to its adequacy in comparison with peer institutions.

We make specific allowances for each impaired loan based on its type and classification as discussed above. We also maintain a general reserve for each loan type in the loan portfolio. In determining the amount of the general reserve portion of our allowance for loan losses, management considers factors such as our historical loan loss experience, the growth, composition and industry diversification of our loan portfolio, current delinquency levels, the results of recent regulatory examinations and general economic conditions. Each factor is designated an adjustment percentage. These adjustment percentages are determined by our historical experience, portfolio trends and economic and industry trends. These percentages are combined with the historical loss percentages for each loan type in the loan portfolio, not including any loan that is classified as substandard, doubtful or loss or that otherwise has a specific allowance allocated to it. This combined percentage is then applied to the amount of loans in that loan type. This information is used by management to set the general reserve portion of the allowance for loan losses at a level it deems prudent.

Our emphasis on continued growth of our loan portfolio through the origination of construction loans, commercial mortgage loans and 1-4 family residential loans has been one of the more significant factors we have taken into account in evaluating the general portion of our allowance for loan losses.

Because there are additional risks of losses that cannot be quantified precisely or attributed to particular loans or types of loans, including general economic and business conditions and credit quality trends, we have established an unallocated portion of the allowance for loan losses based on our evaluation of these risks, which management believes is prudent and consistent with regulatory requirements. The unallocated portion of our allowance for loan losses is determined based on various factors including, but not limited to, general economic conditions of our market area, the growth, composition and industry diversification of our loan portfolio, types of collateral securing our loans, the experience level of our lending officers and staff, the quality of our credit risk management, the results of independent third party reviews of our classification of credits and industry comparable reserve ratios. Due to the relative stability of many of the factors listed above, the unallocated portion of our allowance for loan losses as a percentage of the total allowance has remained consistent over the periods presented. As of June 30, 2004 and 2003, the unallocated portion of the allowance for loan losses was $3.8 million, or 31.3% of the total allowance, and $3.4 million, or 38.0% of the total allowance, respectively.

Based on management’s assessment of the above factors, we recorded a provision for loan losses for the six months ended June 30, 2004 of $1.4 million compared with $1.6 million for the six months ended June 30, 2003, primarily due to lower net charge-offs.

Based on an evaluation of the loan portfolio, management presents a monthly review of the allowance for loan losses to our board of directors, indicating any change in the allowance for loan losses since the last review and any recommendations as to adjustments in the allowance for loan losses.

This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available or as events change. We used the same methodology and generally similar assumptions in assessing the allowance for both comparison periods. We decreased the allowance for loan losses as a percentage of loans outstanding to 1.17% at June 30, 2004 from 1.18% at June 30, 2003. The level of the allowance is based on estimates and the ultimate losses may vary from these estimates.

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.”

As of June 30, 2004, we had $15.1 million of loans classified as substandard, doubtful or loss compared with $14.1 million as of June 30, 2003, an increase of approximately $1.0 million, all of which occurred in the substandard category. As of June 30, 2004, we had specific allocations of $1.6 million in the allowance for loan losses related to these classified loans.

As of June 30, 2004, the allowance for loan losses amounted to $10.8 million or 1.17% of total loans. As of June 30, 2003, the allowance for loan losses totaled $9.7 million or 1.18% of total loans. The allowance for loan losses as a percentage of nonperforming loans increased to 276.62% as of June 30, 2004 from 216.03% as of June 30, 2003.

Net charge-offs were $747,000 for the six months ended June 30, 2004, compared with $835,000 for the same period in 2003. As a percentage of average loans, these net charge-offs were 0.17% for the six months ended June 30, 2004 and 0.21% for the six months ended June 30, 2003. The $487,000 in real estate construction charge-offs for the six months ended June 30, 2004 shown on the preceding table related to two residential development foreclosure write-downs. Both of these loans were made to fund the development of residential construction projects. The loans were charged-off in each case when the developer was unable to successfully sell the properties and unable to service the loan from personal assets. One loan, collateralized by 18 undeveloped lots, six homes and a clubhouse, resulted in a $420,000 charge-off. At the time of foreclosure, the six homes and the clubhouse were substantially completed. The additional funds needed to complete the project included those for cleaning, landscaping and minor repairs. A second loan, collateralized by two homes, resulted in a $66,900 charge-off. At the time of foreclosure, the two homes were substantially completed. The additional funds needed to complete both units included those for carpet, appliances and other interior finishing items.

The $136,000 in real estate mortgage charge-offs represents a decrease from $521,000 in such charge-offs for the six months ended June 30, 2003, primarily as a result of a foreclosure write-down of $491,000.

Charge-offs of consumer and other loans increased to $89,000 for the six months ended June 30, 2004 compared with $16,000 for the same period in 2003 primarily due to increased efforts by our credit administration department to dispose of distressed credits in a more consistent and efficient manner. This increase was partially offset by a $38,000 increase in recoveries on consumer and other 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 June 30, 2004, we had one investment security, in the amount of $2.4 million, which was underwritten as a loan. The security represents a purchased general obligation bond issued by a local municipal government. We record this security as an investment security available-for-sale on our balance sheet and mark it to market as required.


	As of June 30, 2004				As of June 30, 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	$	1,021	11.2	%	$	928	12.3	%
Real estate		5,852	75.8			4,817	75.6
Consumer and other		531	13.0			279	12.1
Unallocated		3,365	—			3,693	—

Total allowance for loan losses	$	10,769	100.0	%	$	9,717	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 June 30, 2004, 96.4% or $273.8 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 83% in U.S. Agency securities, 7% in U.S. Treasury securities and 7% in municipal securities. This portfolio make-up helps minimize interest rate risk associated with call options and prepayments. We took 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 June 30, 2004									As of June 30, 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	$	19,970	$	2	$	(147	)	$	19,825	$	38,212	$	546	$	—		$	38,758
U.S. Agency securities		200,707		37		(2,979	)		197,765		198,154		2,752		—			200,906
Mortgage-backed securities		39,080		5		(839	)		38,246		462		20		(1	)		481
Obligations of counties and municipalities		21,431		155		(297	)		21,289		9,489		468		—			9,957
Other		7,021		—		—			7,021		5,616		—		—			5,616

Total securities	$	288,209	$	199	$	(4,262	)	$	284,146	$	251,933	$	3,786	$	(1	)	$	255,718

Investment securities classified as available-for-sale increased 11.6% from $245.3 million at June 30, 2003 compared with $273.8 million at June 30, 2004. The $28.5 million increase in securities classified as available-for-sale was partially offset by a decrease in federal funds sold.

The following table summarizes the contractual maturity of investment securities on an amortized cost basis and their weighted average yields as of June 30, 2004. Tax-exempt obligations have not been computed on a tax-equivalent basis.


	As of June 30, 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	$	5,006	1.73	%	$	14,964	1.89	%	$	—	—	%	$	—	—	%	$	19,970	1.85	%
U.S. Agency securities		31,568	2.06			169,139	2.17			—	—			—	—			200,707	2.16
Mortgage-backed securities(1)		38,983	3.59			1	7.80			58	7.16			38	7.75			39,080	3.60
Obligations of counties and municipalities		3,819	4.29			10,979	3.55			3,478	5.73			3,155	4.25			21,431	4.14
Other		—				—				—				7,021	3.58			7,021	3.58

Total securities	$	79,376			$	195,083			$	3,536			$	10,214			$	288,209

(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

Interest-bearing deposits, which represent 94.1% of our interest rate-sensitive liabilities as of June 30, 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 $78.4 million or 6.5% to $1.3 billion at June 30, 2004 compared with deposits of $1.2 billion at June 30, 2003. This increase was primarily a result of growth in certificates of deposit resulting from a successful rate promotion. At June 30, 2004, we had $304.5 million in noninterest-bearing deposits

compared with $300.3 million at June 30, 2003, an increase of $4.2 million. Interest-bearing deposits totaled $974.8 million or 76.2% of total deposits at June 30, 2004 compared with $900.5 million or 75.0% of total deposits at June 30, 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 Six Months Ended June 30, 2004				For the Six Months Ended June 30, 2003
	Average Balance		Average Rate		Average Balance		Average Rate
	(dollars in thousands)

Demand	$	302,312	—	%	$	261,837	—	%
Interest checking		339,908	0.58			327,918	1.23
Money market and savings		214,842	0.56			202,786	0.76
Certificates of deposit		395,667	2.72			361,304	3.00

Total deposits	$	1,252,729			$	1,153,845

Weighted average rate			1.12	%			1.43	%

Of our total deposits at June 30, 2004, 23.8% were noninterest-bearing and another 26.7% were low-cost interest-bearing accounts, such as NOW accounts, with an average rate of 0.58% for the first six months of 2004, and money market and savings accounts, with an average rate of 0.56% for the same period. Further, our certificates of deposit in amounts of $100,000 or more represented only 8.3% of our deposits at June 30, 2004. Approximately 80.0% 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 June 30, 2004
	(dollars in thousands)

Three months or less	$	17,358
Over three months through six months		11,849
Over six months through twelve months		46,076
Over one year		29,031

Total	$	104,313

While approximately 72.2% 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 $38.0 million multi-advance term loan with a commercial bank. The loan was subsequently increased to $45.0 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 June 30, 2004, the outstanding balance was $33.1 million. Our obligations under the loan are secured by a pledge of all of the shares of capital stock of our subsidiary, Woodforest National Bank.

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 June 30, 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 Six Months Ended June 30, 2004			As of and for the Six Months Ended June 30, 2003
	(dollars in thousands)

Ending balance	$	90,835		$	75,820
Average balance for the period		91,423			74,321
Maximum month-end balance during the period		92,544			75,835

Average interest rate for the period		4.78	%		5.27	%

At June 30, 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	09/07/2030
Woodforest Statutory Trust III	07/31/2001	07/31/2006	3-month LIBOR + 3.58%		7,732,000	07/31/2031
Woodforest Statutory Trust IV	03/03/2003	03/02/2008	3-month LIBOR + 3.25%		10,310,000	03/03/2033
Woodforest Statutory Trust V	12/04/2003	12/03/2008	3-month LIBOR + 2.90%		10,310,000	12/04/2033

Each of the trusts is a capital or statutory business trust organized for the sole purpose of issuing trust securities and investing the proceeds in our junior subordinated debentures. The preferred trust securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are wholly-owned by us. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon us making payment on the related junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of our present and future senior indebtedness. We have fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by each respective trust.

Under the provisions of each issue of the debentures, we have the right to defer payment of interest on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the debentures are deferred, the distributions on the applicable trust preferred securities and common securities will also be deferred.

In late 2003, the FASB issued Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51 (Revised December 2003).” FIN 46R requires that trust preferred securities be deconsolidated from our consolidated financial statements. We adopted FIN 46R on January 1, 2004 and as a result, no longer reflect the trust preferred securities in our consolidated financial statements. Instead, the junior subordinated debentures are shown as liabilities in our consolidated balance sheets and interest expense associated with the junior subordinated debentures is shown in our consolidated statements of earnings.

The trust preferred securities issued by the trusts are currently included in our Tier 1 capital for regulatory purposes. See “Supervision and Regulation.” However, because the trusts are no longer a part of our consolidated financial statements, the Federal Reserve may in the future disallow inclusion of the trust preferred securities in Tier 1 capital for regulatory purposes. In July 2003, the Federal Reserve issued a supervisory letter instructing bank holding companies to continue to include the trust preferred securities in their Tier 1 capital for regulatory capital purposes until further notice.

On May 6, 2004, the Federal Reserve issued proposed rules that would continue to allow trust preferred securities to be included in Tier 1 capital, subject to stricter quantitative and qualitative limits. Currently, trust preferred securities and qualifying perpetual preferred stock are limited in the aggregate to no more than 25% of a bank holding company’s core capital elements. The proposed rule would amend the existing limit by providing that restricted core capital elements (including trust preferred securities and qualifying perpetual preferred stock) can be no more than 25% of core capital, net of goodwill. Because the 25% limit currently is calculated without deducting goodwill, the proposal, if adopted unchanged, could reduce the amount of trust preferred securities that we can include in Tier 1 capital. In addition, under the proposal, the amount of such excess trust preferred (when aggregated with subordinated debt securities and certain other investments) includable in Tier 2 capital would be limited to 50% of Tier 1 capital. Assuming these proposed rules were effective at June 30, 2004, and giving effect to this offering, on a pro forma basis as of June 30, 2004, our Tier 1 risk-based capital ratio would decrease from 8.26% to 7.52%, our total risk-based capital ratio would decrease from 11.05% to 10.90% and our Tier 1 leverage ratio would decrease from 6.26% to 5.63%. The new quantitative limits are scheduled to be fully effective March 31, 2007.

Each of the trusts issuing the trust preferred securities holds junior subordinated debentures we issued with a 30-year maturity. The proposed rules provide that in the last five years before the junior subordinated debentures mature, the associated trust preferred securities will be excluded from Tier 1 capital and included in Tier 2 capital, subject (together with subordinated debt and certain other investments) to an aggregate limit of 50% of Tier 1 capital. In addition, under the proposal, the trust preferred securities during this five-year period would be amortized out of Tier 2 capital by one-fifth each year and excluded from Tier 2 capital completely during the year prior to maturity of the debentures.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into various transactions which, in accordance with accounting principles generally accepted in the United States, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

Our commitments associated with outstanding letters of credit and commitments to extend credit as of June 30, 2004 are summarized below. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements:


	Payments due in:
	2004		Fiscal 2005-2006		Fiscal 2007-2008		Thereafter		Total
	(dollars in thousands)

Standby letters of credit	$	2,717	$	7,813	$	—	$	—	$	10,530
Commitments to extend credit		30,907		93,863		31,063		17,763		173,596

Total	$	33,624	$	101,676	$	31,063	$	17,763	$	184,126

Standby Letters of Credit. Standby letters of credit are written conditional commitments we issue to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the customer. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. We previously did not record a liability when guaranteeing obligations unless it became probable that we would have to perform under the guarantee. FIN 45 applied prospectively to guarantees by us issued or modified effective for interim and annual periods ending after December 15, 2002. We rarely issue guarantees, as such, to date FIN 45 has had no material effect on our financial statements.

Commitments to Extend Credit. We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses.

Interest Rate Sensitivity and Market Risk

We are engaged primarily in the business of investing funds obtained from deposits and borrowings into interest-bearing loans and investments, and our primary component of market risk is interest rate risk volatility. Consequently, our earnings depend to a significant extent on our net interest income, which is the difference between the interest income on our loans and investments and the interest expense on our deposits and other borrowed funds. To the extent that our interest-bearing liabilities do not reprice or mature at the same time as our interest-bearing assets, we are subject to interest rate risk and corresponding fluctuations in net interest income. We have employed asset/liability management policies that attempt to manage our interest-earning assets and interest-bearing liabilities, thereby attempting to control the volatility of net interest income, without having to incur unacceptable levels of credit or investment risk.

Our asset/liability and funds management policy provides management with the necessary guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position within established guidelines. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.

Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective of our policy is to measure the effect of interest rate changes on net interest income and to structure the balance sheet components to minimize the inherent risk while at the same time attempting to maximize income.

Our exposure to interest rate risk is managed by the bank’s Asset/Liability Committee (ALCO), which is composed of senior officers of the bank, in accordance with policies approved by our board of directors. The ALCO formulates strategies based on appropriate levels in interest rate risk. In determining the appropriate level of interest rate risk, the ALCO considers the impact on earnings and capital based on the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies, and other factors. The ALCO meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activity, commitments to originate loans, and the maturities of investments and borrowings. Additionally, the ALCO reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management uses two methodologies to manage interest rate risk: (1) an analysis of relationships between interest-earning assets and interest-bearing liabilities and (2) an interest rate shock simulation model. We have traditionally managed our business to reduce its overall exposure to changes in interest rates.

To effectively measure and manage interest rate risk, we use an interest rate shock simulation model to determine the impact on net interest income under various interest rate scenarios, balance sheet trends and strategies. From these simulations, interest rate risk is quantified and appropriate strategies are developed and implemented. Additionally, duration and market value sensitivity measures are utilized when they provide added value to the overall interest rate risk management process. The overall interest rate risk position and strategies are reviewed by our board of directors on an ongoing basis.

Our interest rate sensitivity is primarily monitored by management through the use of a model which generates estimates of the change in our present value of equity over a range of interest rate scenarios. Present value of equity represents the present value of expected cash flows from assets, liabilities, and off-balance sheet contracts using standard industry assumptions about estimated loan prepayment rates, reinvestment rates and deposit decay rates.

The following table sets forth an analysis of our interest rate risk as measured by the estimated change in our present value of equity resulting from instantaneous and sustained parallel shifts in the yield curve as of December 31, 2003:


Change in Rates	$ Change in Present Value of Equity		% Change in Rates		Present Value of Equity as a % of Present Value of Assets
	(dollars in thousands)				Ratio		Change
-200 bp	$	106,315	(19.37	)%	7.69	%	(2.08	)%
0 bp		131,852	—		9.77		—
+200 bp		151,505	14.90		11.45		1.68

Certain limitations are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in the present value of equity require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. Accordingly, although the above table provides an indication of our interest rate risk exposure at a particular point in time, such measurement is not intended to and does not provide a precise forecast of the effect of changes in market interest rates on our worth.

We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We do not currently enter into instruments such as leveraged derivatives, structured notes, interest rate swaps, caps, floors, financial options, or financial futures contracts for the purpose of reducing interest rate risk.

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

The following table sets forth our interest rate sensitivity analysis as of June 30, 2004:


	Volumes Subject to Repricing Within
	0-3 Months		3-12 Months		12-36 Months		Greater than 36 Months		Total
	(dollars in thousands)
Interest-earning assets:
Securities	$	6,641	$	36,205	$	198,123	$	47,240	$	288,209
Loans		441,168		133,712		174,479		174,208		923,567
Time deposits		658		—		—		—		658
Federal funds sold and other temporary investments		13,740		—		—		—

Woodforest Financial Group,Inc. S-1/A