Overview - Zacks Investment Research



February 13, 2005

Editor: Ian Madsen, MBA, CFA

imadsen@, Tel:  1-800-767-3771, x 417

Res. Assoc.: Dipanwita Roy Chowdhury, (Hons.)

155 North Wacker Drive ( Chicago, IL 60606

Southwest Bancorporation of Texas, Inc. (SWBT) (NASDAQ - $23.28)

Note to Readers: This report contains substantially new material. Subsequent editions will have new or revised material highlighted.

Overview

Southwest Bancorporation of Texas, Inc. (SWBT), the parent company of Southwest Bank of Texas NA, is the largest independent bank holding company headquartered in Houston, Texas. The Company focuses on commercial lending, treasury management and investment services for businesses, private financial management and trust services for families and individuals, and retail and mortgage banking services. The Company, with $7.51 billion in assets, has over 75 full-service banking centers located throughout the Houston and Dallas metropolitan areas.

SWBT operates on a calendar-year basis.

|Key Positive Arguments |Key Negative Arguments |

|credit quality trends relatively stable |flattish NIM expected in 2005 |

|bright prospects of earnings growth |loan growth expected to moderate in 2005 |

|core loan & deposit growth was solid |regional concentration is a concern |

|culture is customer-focused and technology-driven |integration risk to some extent, with two deals recently |

|treasury mgmt. product allows differentiated calling |expected increase in operating expenses |

On October 1, Southwest completed the acquisition of Klein Bancshares, which added 27 branches in northwest Houston, $168.7 million in loans and $556 million in deposits. The impact to the income statement was $2.4 million of non-interest income and $8.2 million non-interest expenses, including $4.2 million operating, $1.5 million - core deposit intangible amortization and $1.9 million - merger-related expenses. The merger integration does not take place until March 7.

Management disclosed that in conjunction with the change in the company's name, it would spend about $5.5 million during 2005 to promote the new brand in order to separate the bank from other financial institutions using the term "Southwest" in their corporate name. The Bank will become Amegy Bank NA on March 7, 2005. The NASDAQ stock symbol will be changed to ABNK.

Sales

The tables herein are current as of 2/13/05. Please refer to the separately published spreadsheet for additional detail and updated forecasts.

Prior to the Q4 earnings release, the consensus was calling for 17.7% growth in NII in 2005, and 12.6% growth in total non-interest. Following the release, the NII forecast rose to 21.0%, while the non-interest increased to 21.6%.

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Growth in average balances has been heavily influenced by acquisitions.

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Non-interest income growth has begun to turn positive again. SWBT does not have the significant exposure to the residential mortgage market that many of its regional peers do.

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Margins

Prior to Q4 earnings, the consensus had called for a 31.9% pre-tax margin in Q1. Afterward, the expectation decreased to 27.8%. The expectation for 2005 also decreased from 32.9% to 29.9%.

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Please refer to the separately published spreadsheet for additional detail and updated forecasts.

Earnings Per Share

Both Q1 and ’05 consensus fell following Q4 results. Q1 fell to $0.26 from $0.29 whereas ’05 fell to $1.14 from $1.23.

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Please refer to the separately published spreadsheet for additional detail and updated forecasts.

Target Price / Valuation

There were two upgrades following Q4 results, but five of the eight target prices were decreased and only one increased.

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Please refer to the separately published spreadsheet for additional detail and updated forecasts.

Upcoming Events

|Events |Dates |

|FOMC meeting |March 22 |

|Q1 earnings release |Mid-April |

|FOMC meeting |May 3 |

Long-Term Growth

Growth has not been a problem for SWBT. Though it is the largest bank headquartered in Houston, there is still plenty of business to be had. SWBT has taken advantage of opportunities to take both employees and customers from Houston’s larger out-of-state banks, and will likely continue to do so. In addition, SWBT now has a loan production office in Dallas, and has begun marketing its treasury management product in other major markets. Its treasury product represents a particular opportunity for growth, as it is a differentiated product that gets them in the door and establishes a relationship that can be cross-sold other services. Another specific opportunity for growth is in the area of wealth management and private banking. Though SWBT offers these services now, it remains a relatively small piece of the business overall.

Acquisitions were playing a growing role in SWBT’s growth, and will continue to serve to fill in gaps or aid in strategic growth initiatives. In July of 2003, SWBT completed the acquisition of Maxim Financial Holdings, increasing SWBT’s branch presence by roughly 25% and giving SWBT a presence in adjacent Galveston County. It pursued a similar strategy to gain a retail presence in Dallas / Ft. Worth, completing in February of 2004 the acquisition of Reunion Bancshares / Lone Star Bank. The October 2004 closing of the Klein Bancshares added 27 banking centers. Given that it has completed three acquisitions in the past 18-months, acquisitions are a lower priority and the focus is to show better organic growth.

Individual Analyst Opinions

POSITIVE RATINGS

Legg Mason – Stock is rated Buy (upgraded 2/7/05). “We are upgrading our rating on the shares of Southwest Bancorporation of Texas to Buy from Hold and are establishing a target price of $22, equating to 18.8x our 2005 EPS estimate of $1.17 (four cents above consensus and reflective of 18% expected EPS growth next year). While we acknowledge that the interest rate environment is not an ideal one for the group's fundamental outlook, we believe that, relative to projected earnings capability related to above-peer loan and deposit growth, the shares now present a more compelling longer-term opportunity... We also believe timing is of the essence given the stock's year-to-date underperformance and would note that, over a 15-year period ending in January 2005, the average regional bank experienced a decline in its stock price of 15% or more over a one-week period only 2 out of 784 weeks, or about 0.2% of the period studied. Finally, we are adding Southwest Bancorporation of Texas to the Legg Mason Select List as our compelling idea replacing North Fork Bancorporation.”

Merrill – Stock is rated Buy (initiated 10/28/04). “While 4Q earnings results were distorted by merger-murk, we remain encouraged by an improving economic backdrop across Texas, substantial loan growth prospects, and sustained strong credit quality. We see potential upside to SWBT’s deposit growth prospects this year, augmented by the marketing campaign associated with its name change. We think SWBT deserves to trade at 20x our 2005 cash EPS estimate of $1.25, consistent with 20% cash EPS growth prospects this year... Including SWBT’s announced advertising budget and higher expenses related to fair value accounting for stock options, we are lowering our 2005-2006 EPS estimates from $1.26 and $1.47, respectively, to $1.15 and $1.38. Our revised estimate implies 20% “cash” EPS growth in 2005, two-times the Small-Cap Bank median growth profile. “Cash” EPS exclude amortization of core deposit intangibles… Due to our estimate revision, we are lowering our twelvemonth price objective from $26 to $25.”

Stephens – Stock is rated Over-Weight (upgraded 1/27/05). “As a result of the quarter and higher expense levels anticipated in 1Q05, we are lowering our 2005 EPS estimate to $1.18 from $1.22. However, given management’s guidance for a stable net interest margin and improvement in the efficiency ratio (partially from core deposit amortization), we are raising our 2006 EPS estimate to $1.38 from $1.34. Our estimate for this quarter (1Q05) is now $0.25, down from $0.28... As a result of our revised forecast for 2006, we are raising our price target on SWBT to $23 from $22. This target is calculated by applying the Bank’s 2005 EPS multiple of 17x to our new 2006 EPS estimate. In addition, given the stock’s proximity to this new target, we are compelled to raise our rating on shares of SWBT to Overweight from Equal-Weight, and we believe the current stock levels present an attractive near-term entry level for investors… We believe the sell-off that occurred in SWBT, which brought the stock down nearly 10%, was overdone. While operating expenses associated with the acquisition of Klein Bank (ongoing expense of $4.8 million, integration costs of $1.9 million and core intangibles expenses of $2.2 million) were above our expectations, we believe cost efficiencies during 2005 will lead to an even stronger 2006.”

NEUTRAL RATINGS

Advest – Stock is rated Neutral. “We are lowering our 2005 EPS estimate from $1.23 to $1.11. The lower estimates reflect the estimated $5.5 million or $0.05 per share costs associated with the name change to Amegy Bank, we are reducing our net interest margin assumptions from 4.07% to 3.94% (reasons are discussed below in the net interest income section) and increasing our core expenses as the core expense base in 4Q04 was higher than forecast. In addition, we are reducing our 2006 EPS estimate by $0.05 to $1.33… We are maintaining our Neutral rating on SWBT based on valuation, as it is trading at a 7% premium to the Texas bank peer group.”

FTN Midwest Res. – Stock is rated Neutral.

J. P. Morgan – Stock is rated Neutral (initiated 12/15/04). “In light of our expectation for Southwest to continue to deliver above average loan growth and solid double-digit EPS growth in the face of intensifying competition and a flattening yield curve, we believe the stock's 14% premium valuation to the small cap banks is full, and additional near-term upside potential appears minimal. We also believe downside to the stock will likely be limited by continued merger speculation as M&A activity has been rapid and large out-of-state banks have recently expressed their willingness to acquire significantly smaller franchises to gain share in Texas. Therefore, we reiterate our Neutral rating on SWBT relative to our small cap bank coverage universe... We see three primary areas of risk: (1)The consolidating Texas landscape could pressure Southwest into a dilutive deal, although Southwest has a disciplined acquisition track record. On the other hand, the shares could outperform the group if Southwest were to sell to a larger acquirer; however, we believe it is unlikely to do so over the next 12 months. (2) A sluggish economy and flattish rate environment could pressure earnings. (3) Asset sensitivity bodes well, but the benefit is likely to be muted near term given the presence of loan floors.”

Keefe Bruyette – Stock is rated Market-Perform (initiated 7/12/04). “The shares currently trade at 17.5x our revised 2005 estimate and at 3.6x tangible book value. The shares are relatively expensive versus peers, but we note that we believe the long term growth rate is a premium one. Investors currently appear to us to be questioning the business model for SNCs and the name change, both of which we believe a valid business case can be made and that both are the right decisions for shareholders over time. Still, with the uncertainty in the market place, we remain cautious on SWBT shares and reiterate our Market Perform rating… We are reducing our 2005 EPS estimate to $1.15 (which excludes $0.06 of name change expense) from $1.22 and our 2006 EPS estimate to $1.30 from $1.40 to reflect the higher expense base going forward. As a result of our estimate changes, we are lowering our price target to $22.50 from $25.”

Lehman – Stock is rated Equal-Weight. “We are lowering our 2005 EPS estimate to $1.10 from $1.20 to take into account trends in the quarter, discussed above, many of which we believe will carry into 2005. We would point out, however, that we do expect to see some margin expansion in 2005 as securities from Klein fund loan growth. We are establishing a preliminary 2006 EPS estimate of $1.26. We rate SWBT 2-Equal weight, and are lowering our price target to $20 from $23, which is supported by our DCF and ROIC models. Our new price target is equivalent to 18.6x our new 2005 EPS estimate or a 14.5% premium to the group average 2005 EPS multiple of 16.2x. We consider a 10%-15% premium appropriate, down from the former 15%-20% premium we supported prior to 4Q04 EPS results, as while earnings are still consistent on a relative basis, the volatility in the quarter and the uncertainty over the actual asset sensitivity of the company given recent margin movements have diluted the value of the strong fundamentals that we believe have helped drive the company’s growing premium in the recent past.”

Piper Jaffray – Stock is rated Market-Perform. “We maintain our Market Perform rating. Shares of Southwest Bancorporation of Texas are trading at 16.8x our 2005 EPS estimate of $1.20 and 14.4x our 2006 EPS estimate of $1.40, or relative market multiples of 102% and 93%, respectively, near average for the peer group of Texas banks we follow... Risks to achievement of our 12-month price target include, but are not limited to, future economic conditions, monetary and fiscal policies, interest rate risk, market competition, asset quality, and successful acquisition integration.”

RBC Cap. – Stock is rated Sector-Perform. “We are lowering our 2005 EPS estimate to $1.12 from $1.20 to reflect the slower margin expectations for 2005. We are initiating a 2006 estimate of $1.28. We are lowering our price target to $20 from $22, which is a 16 multiple on our 2006 estimate. This is a slight premium to the peer group but is consistent with the strong historical valuation of the company and reflects the continuation of above average loan growth expectations... We do believe that this will be a stronger fundamental year for the company, particularly if the margin issues fade, and we do believe that the company has significant long term value creation potential. That said, the early part of 2005 is expected to be expense heavy and will carry some of the uncertainty of the name change and those issues cause us to maintain our Sector Perform rating.”

Sanders Morris Harris- Stock is rated Hold (initiated 6/17/04). “We believe the share price already reflects the valuation awarded premier banking companies, thus we find the shares fairly valued at this time. Southwest's shares currently trade in line with their peers. We believe this is due to a longstanding record of strong earnings growth, a disciplined and innovative management team that understands their core business banking market and primary retail customer base, and conservative loan underwriting and administration that has kept asset quality excellent. The shares may be under pressure near term given the disappointment over the quarter's performance and the costs associated with the name change… As with most investments, there are risks and uncertainties to achieving our estimated results. These include a material change in interest rates, both short-term and long-term. Also, economic conditions may cause our estimates to vary. Other issues that could cause earnings risks are asset quality, loan and deposit growth trends, and higher operating expenses.”

Smith Barney – Stock is rated Hold. “We rate Southwest Bancorporation of Texas shares (SWBT) Hold/Medium Risk (2M) with a target price of $21. Southwest Bancorporation of Texas is, in our view, one of the leading growth bank of its size in the country and fully deserving of a premium valuation. During the 1990s, Southwest rode the booming Houston economy, and took advantage of three waves of dislocations in the Texas and Houston commercial banking markets to gain market share. In the near term (and intermediate term), we believe the Houston economy could be less of a growth driver, meaning that Southwest could need to be more reliant on taking market share in Houston organically (which it continues to do) and through acquisition and on expanding into Dallas/Fort Worth (with a 2004 acquisition) to sustain growth. We rate the shares a Hold due to current valuation.”

Suntrust RH. – Stock is rated Neutral (downgraded 4/21/04). “With the largest lending force in Houston, SWBT targets the underserved middle market niche. As a result, SWBT has steadily gained market share from its competitors over the last several years, and we expect that trend to continue as these banks focus on large commercial credits and retail banking. Given its historical market share gains, SWBT should be the largest Texas based beneficiary of the merger between J.P.Morgan Chase and Bank One. Even though an estimated 33% of the Houston economy is tied to energy, the city is more diverse than it was in the mid-1980s, thanks to NASA, the Texas Medical Center and the Port of Houston. Houston is also home to 22 Fortune 500 corporations.”

NEGATIVE RATINGS

None

NO COVERAGE

Morgan Keegan – coverage discontinued (8/17/04) due to analyst departure.

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Research Digest

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