Southwest Bancorporation of Texas, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except share and per share amounts)

1. Nature of Operations and Summary of Significant Accounting Policies:

Basis of Presentation and Nature of Operations

The consolidated financial statements include the accounts of Southwest Bancorporation of Texas, Inc. (the ‘‘ Company") and its direct and indirect wholly-owned subsidiaries, Southwest Holding Delaware Inc. (the ‘‘ Delaware Company") , Southwest Bank of Texas National Association (the ‘‘ Bank") , and Mitchell Mortgage Company, LLC (‘‘Mitchell") . The consolidated financial statements also include the accounts of First National Bank of Bay City, a 58% owned subsidiary of the Delaware Company. All material intercompany accounts and transactions have been eliminated.

Substantially all of the Company’s revenue and income is derived from the operations of the Bank. The Bank provides a full range of commercial and private banking services to small and middle market businesses and individuals in the Houston metropolitan area.

In connection with the Company’s merger with Citizens Bankers, Inc. (‘‘Citizens") and acquisition of all of the assets and liabilities of Citizens Bankers Limited Partnership (‘‘CBLP") (as more fully discussed in note 2) , the historical financial data has been restated to include the accounts and operations of Citizens and CBLP for all periods presented.

Management ’ Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of income and expenses during the reporting periods. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers federal funds sold, due from bank demand accounts and other highly liquid investments purchased with a maturity of three months or less to be cash equivalents. The Company classifies investments in money market funds as securities and not cash equivalents.

The Company is required to maintain noninterest-bearing cash reserve balances with the Federal Reserve Bank. The average of such cash balances was approximately $5,325 and $7,734 for the years ended December 31, 2000 and 1999, respectively.

Securities

Securities which management intends and has the ability to hold to maturity are classified as held to maturity. Securities held to maturity are stated at cost, increased by accretion of discounts and reduced by amortization of premiums, both computed by the interest method.

Securities to be held for indefinite periods of time, including securities that management intends to use as part of its asset/liability strategy, or that may be sold in response to changes in interest rates, changes in prepayment risk, the need to increase regulatory capital or other similar factors, are classified as available for sale and are carried at fair value. Fair values of securities are estimated based on available market quotations. Unrealized holding gains and losses, net of taxes, on available for sale securities are reported as a separate component of other comprehensive income until realized. The amortized cost of securities available for sale is increased by accretion of discounts and reduced by amortization of premiums, both computed by the interest method. Gains and losses on the sale of available for sale securities are determined using the specific identification method.