##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D. C. 20549
 
 FORM 10-Q
 
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
  Commission File Number: 0-20750
 
 STERLING BANCSHARES, INC.
  Texas
(State or other jurisdiction of
incorporation or organization)
    
    74-2175590
(I.R.S. Employer
Identification Number)2550 North Loop West, Suite 600
Houston, Texas
Address of principal executive office)
    
    77092
(Zip Code)
 713-466-8300
 þ o
 þ o




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STERLING BANCSHARES, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2005
TABLE OF CONTENTS
  
 PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets
    
    
    2Consolidated Statements of Income
    
    
    3Consolidated Statements of Shareholders Equity
    
    
    4Consolidated Statements of Cash Flows
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    29Item 4.
    
    Controls and Procedures
    
    
    29PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    29Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3.
    
    Defaults Upon Senior Securities
    
    
    29Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    29Item 5.
    
    Other Information
    
    
    30Item 6.
    
    Exhibits
    
    
    30SIGNATURES
    
    
    32Certification of President and CEO pursuant to Section 302Certification of Executive VP and CFO pursuant to Section 302Certification pursuant to Section 906Certification Pursuant to Section 906




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 STERLING BANCSHARES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)  (In thousands, except share amounts)
 June 30,
    
    
    December 31,2005
    
    
    2004ASSETSCash and cash equivalents
    
    $
    90,679
    
    
    $
    88,439Interest-bearing deposits in financial institutions
    
    
    199
    
    
    
    595Trading assets
    
    
    15,556
    
    
    
    36,720Available-for-sale securities, at fair value
    
    
    573,564
    
    
    
    540,704Held-to-maturity securities, at amortized cost
    
    
    120,656
    
    
    
    117,414Loans held for sale
    
    
    9,195
    
    
    
    6,881Loans held for investment
    
    
    2,574,450
    
    
    
    2,338,096Total loans
    
    
    2,583,645
    
    
    
    2,344,977Allowance for loan losses
    
    
    (32,209
    )
    
    
    (29,406
    )Loans, net
    
    
    2,551,436
    
    
    
    2,315,571Premises and equipment, net
    
    
    38,299
    
    
    
    40,171Real estate acquired by foreclosure
    
    
    1,472
    
    
    
    1,536Goodwill
    
    
    62,480
    
    
    
    62,480Core deposit intangibles, net
    
    
    1,625
    
    
    
    1,839Accrued interest receivable
    
    
    13,476
    
    
    
    11,964Other assets
    
    
    121,991
    
    
    
    119,463TOTAL ASSETS
    
    $
    3,591,433
    
    
    $
    3,336,896LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIES:Deposits:Noninterest-bearing demand
    
    $
    928,564
    
    
    $
    884,017Interest-bearing demand
    
    
    961,134
    
    
    
    970,281Certificates and other time deposits
    
    
    715,482
    
    
    
    589,669Total deposits
    
    
    2,605,180
    
    
    
    2,443,967Short-term borrowings
    
    
    503,725
    
    
    
    420,575Subordinated debt
    
    
    47,956
    
    
    
    47,162Junior subordinated debt
    
    
    82,475
    
    
    
    82,475Accrued interest payable and other liabilities
    
    
    26,739
    
    
    
    29,545Total liabilities
    
    
    3,266,075
    
    
    
    3,023,724COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    SHAREHOLDERS EQUITY:Preferred stock, $1 par value, 1,000,000 shares authorized, no shares
issued and outstanding at June 30, 2005 and December 31, 2004, respectively
    
    
    
    
    
    
    Common stock, $1 par value, 100,000,000 shares authorized, 45,282,914 and 45,068,048
issued and outstanding at June 30, 2005 and December 31, 2004, respectively
    
    
    45,283
    
    
    
    45,068Capital surplus
    
    
    56,973
    
    
    
    54,522Retained earnings
    
    
    224,667
    
    
    
    213,814Accumulated other comprehensive loss, net of tax
    
    
    (1,565
    )
    
    
    (232
    )Total shareholders equity
    
    
    325,358
    
    
    
    313,172TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    3,591,433
    
    
    $
    3,336,896
 See Notes to Consolidated Financial Statements.
 2




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##### Table of Contents



STERLING BANCSHARES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 (UNAUDITED)  (In thousands, except per share amounts)
 Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Interest income:Loans, including fees
    
    $
    43,634
    
    
    $
    33,023
    
    
    $
    83,515
    
    
    $
    66,257Securities:Taxable
    
    
    6,345
    
    
    
    4,977
    
    
    
    12,500
    
    
    
    9,997Non-taxable
    
    
    612
    
    
    
    464
    
    
    
    1,240
    
    
    
    919Trading assets
    
    
    322
    
    
    
    991
    
    
    
    634
    
    
    
    2,453Federal funds sold
    
    
    122
    
    
    
    23
    
    
    
    159
    
    
    
    43Deposits in financial institutions
    
    
    6
    
    
    
    16
    
    
    
    15
    
    
    
    31Total interest income
    
    
    51,041
    
    
    
    39,494
    
    
    
    98,063
    
    
    
    79,700Interest expense:Demand and savings deposits
    
    
    1,853
    
    
    
    1,080
    
    
    
    3,627
    
    
    
    2,033Certificates and other time deposits
    
    
    4,669
    
    
    
    3,275
    
    
    
    8,041
    
    
    
    6,640Short-term borrowings
    
    
    3,669
    
    
    
    586
    
    
    
    6,359
    
    
    
    1,267Subordinated debt
    
    
    882
    
    
    
    646
    
    
    
    1,695
    
    
    
    1,267Junior subordinated debt
    
    
    1,722
    
    
    
    1,617
    
    
    
    3,412
    
    
    
    3,238Total interest expense
    
    
    12,795
    
    
    
    7,204
    
    
    
    23,134
    
    
    
    14,445Net interest income
    
    
    38,246
    
    
    
    32,290
    
    
    
    74,929
    
    
    
    65,255Provision for credit losses
    
    
    3,221
    
    
    
    2,781
    
    
    
    6,561
    
    
    
    6,281Net interest income after provision for credit losses
    
    
    35,025
    
    
    
    29,509
    
    
    
    68,368
    
    
    
    58,974Noninterest income:Customer service fees
    
    
    2,888
    
    
    
    3,794
    
    
    
    5,880
    
    
    
    7,815Net gain (loss) on trading assets
    
    
    (11
    )
    
    
    152
    
    
    
    98
    
    
    
    485Net gain (loss) on the sale of securities
    
    
    (31
    )
    
    
    4,128
    
    
    
    54
    
    
    
    4,271Other
    
    
    3,642
    
    
    
    2,701
    
    
    
    7,130
    
    
    
    5,406Total noninterest income
    
    
    6,488
    
    
    
    10,775
    
    
    
    13,162
    
    
    
    17,977Noninterest expense:Salaries and employee benefits
    
    
    16,938
    
    
    
    17,175
    
    
    
    34,119
    
    
    
    34,862Occupancy expense
    
    
    3,909
    
    
    
    3,743
    
    
    
    7,551
    
    
    
    7,340Technology
    
    
    1,381
    
    
    
    1,537
    
    
    
    2,595
    
    
    
    2,925Professional fees
    
    
    1,630
    
    
    
    1,395
    
    
    
    2,926
    
    
    
    2,457Postage, delivery and supplies
    
    
    778
    
    
    
    816
    
    
    
    1,528
    
    
    
    1,691Marketing
    
    
    617
    
    
    
    539
    
    
    
    1,262
    
    
    
    925Core deposit intangibles amortization
    
    
    102
    
    
    
    124
    
    
    
    214
    
    
    
    248Other
    
    
    3,779
    
    
    
    4,698
    
    
    
    7,642
    
    
    
    8,570Total noninterest expense
    
    
    29,134
    
    
    
    30,027
    
    
    
    57,837
    
    
    
    59,018Income before income taxes
    
    
    12,379
    
    
    
    10,257
    
    
    
    23,693
    
    
    
    17,933Provision for income taxes
    
    
    3,863
    
    
    
    3,184
    
    
    
    7,419
    
    
    
    5,626Net Income
    
    $
    8,516
    
    
    $
    7,073
    
    
    $
    16,274
    
    
    $
    12,307Earnings per share:Basic
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.36
    
    
    $
    0.28Diluted
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.36
    
    
    $
    0.27
 See Notes to Consolidated Financial Statements.
 3




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##### Table of Contents



STERLING BANCSHARES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (UNAUDITED)  (In thousands)
 AccumulatedConvertible
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    OtherPreferred Stock
    
    
    Common Stock
    
    
    Capital
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Surplus
    
    
    Earnings
    
    
    Income (Loss)
    
    
    TotalBALANCE AT JANUARY 1, 2004
    
    
    20
    
    
    $
    20
    
    
    
    44,642
    
    
    $
    44,642
    
    
    $
    48,953
    
    
    $
    197,819
    
    
    $
    1,162
    
    
    $
    292,596Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,307
    
    
    
    
    
    
    
    12,307Net change in unrealized gains and losses on
available-for-sale securities, net of taxes of ($3,089)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,736
    )
    
    
    (5,736
    )Less: Reclassification adjustment for losses
included in net income, net of taxes of $248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    461
    
    
    
    461Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,032Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    211
    
    
    
    211
    
    
    
    1,900
    
    
    
    
    
    
    
    
    
    
    
    2,111Cash dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,475
    )
    
    
    
    
    
    
    (4,475
    )BALANCE AT JUNE 30, 2004
    
    
    20
    
    
    $
    20
    
    
    
    44,853
    
    
    $
    44,853
    
    
    $
    50,853
    
    
    $
    205,651
    
    
    $
    (4,113
    )
    
    $
    297,264BALANCE AT JANUARY 1, 2005
    
    
    
    
    
    $
    
    
    
    
    45,068
    
    
    $
    45,068
    
    
    $
    54,522
    
    
    $
    213,814
    
    
    $
    (232
    )
    
    $
    313,172Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,274
    
    
    
    
    
    
    
    16,274Net change in unrealized gains and losses on
available-for-sale securities, net of taxes of ($698)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,298
    )
    
    
    (1,298
    )Less: Reclassification adjustment for gains
included in net income, net of taxes of ($19)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35
    )
    
    
    (35
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,941Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    215
    
    
    
    215
    
    
    
    2,451
    
    
    
    
    
    
    
    
    
    
    
    2,666Cash dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,421
    )
    
    
    
    
    
    
    (5,421
    )BALANCE AT JUNE 30, 2005
    
    
    
    
    
    $
    
    
    
    
    45,283
    
    
    $
    45,283
    
    
    $
    56,973
    
    
    $
    224,667
    
    
    $
    (1,565
    )
    
    $
    325,358
 See Notes to Consolidated Financial Statements.
 4




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##### Table of Contents



STERLING BANCSHARES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)  (In thousands)
 Six Months Ended June 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    16,274
    
    
    $
    12,307Adjustments to reconcile net income to net cash provided by operating activities:Amortization and accretion of premiums and discounts on securities, net
    
    
    1,555
    
    
    
    4,429Net gain on the sale of securities
    
    
    (54
    )
    
    
    (4,271
    )Net gain on the sale of premises and equipment
    
    
    (36
    )
    
    
    (43
    )Net gain on trading assets
    
    
    (98
    )
    
    
    (485
    )Provision for credit losses
    
    
    6,561
    
    
    
    6,281Writedowns, less gains on sale, of real estate acquired by foreclosure
    
    
    (29
    )
    
    
    (37
    )Writedowns of premises and equipment
    
    
    
    
    
    
    1,109Depreciation and amortization
    
    
    3,881
    
    
    
    4,472Proceeds from sales of trading assets
    
    
    92,562
    
    
    
    247,173Purchases of trading assets
    
    
    (95,667
    )
    
    
    (186,880
    )Proceeds from principal paydowns of trading securities
    
    
    20,801
    
    
    
    2,114Net increase in loans held for sale
    
    
    (2,314
    )
    
    
    (5,574
    )Net decrease (increase) in accrued interest receivable and other assets
    
    
    (3,324
    )
    
    
    678Net decrease in accrued interest payable and other liabilities
    
    
    (1,935
    )
    
    
    (17,169
    )Net cash provided by operating activities
    
    
    38,177
    
    
    
    64,104CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from the maturities or calls and paydowns of held-to-maturity securities
    
    
    11,577
    
    
    
    4,042Proceeds from the sale of available-for-sale securities
    
    
    44,257
    
    
    
    145,737Proceeds from maturities or calls and paydowns of available-for-sale securities
    
    
    69,018
    
    
    
    79,168Purchases of available-for-sale securities
    
    
    (146,022
    )
    
    
    (165,758
    )Purchases of held-to-maturity securities
    
    
    (14,916
    )
    
    
    (7,331
    )Net increase in loans held for investment
    
    
    (241,083
    )
    
    
    (16,402
    )Proceeds from sale of real estate acquired by foreclosure
    
    
    984
    
    
    
    1,410Net decrease (increase) in interest-bearing deposits in financial institutions
    
    
    396
    
    
    
    (242
    )Proceeds from sale of premises and equipment
    
    
    248
    
    
    
    146Purchase of premises and equipment
    
    
    (2,004
    )
    
    
    (3,611
    )Net cash (used in) provided by investing activities
    
    
    (277,545
    )
    
    
    37,159CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    161,213
    
    
    
    70,236Net increase (decrease) in short-term borrowings
    
    
    83,150
    
    
    
    (174,410
    )Proceeds from issuance of common stock
    
    
    2,666
    
    
    
    2,111Dividends paid
    
    
    (5,421
    )
    
    
    (4,475
    )Net cash provided by (used in) financing activities
    
    
    241,608
    
    
    
    (106,538
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    2,240
    
    
    
    (5,275
    )CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    88,439
    
    
    
    136,764End of period
    
    $
    90,679
    
    
    $
    131,489Supplemental information:Income taxes paid
    
    $
    7,600
    
    
    $
    23,655Interest paid
    
    
    21,595
    
    
    
    13,830Noncash investing and financing activities-Acquisitions of real estate through foreclosure of collateral
    
    
    891
    
    
    
    1,857
 See Notes to Consolidated Financial Statements
 5




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##### Table of Contents



STERLING BANCSHARES, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1.
    
    ACCOUNTING POLICIES
 Basis of Presentation
  Recent Accounting Standards
 The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments . The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain investments
 SFAS No. 123R, Share-Based Payment (Revised 2004)
  Accounting
Changes and Error Corrections
 6




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##### Table of Contents



Stock-Based Compensation
   Three months ended June 30,
    
    
    Six months ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    8,516
    
    
    $
    7,073
    
    
    $
    16,274
    
    
    $
    12,307Add: Stock-based employee compensation expense
included in reported net income, net of related taxes
    
    
    241
    
    
    
    207
    
    
    
    241
    
    
    
    367Less: Total stock-based employee compensation
expense determined under fair value-based method,
net of related taxes
    
    
    (374
    )
    
    
    (390
    )
    
    
    (514
    )
    
    
    (758
    )Pro-forma net income
    
    $
    8,383
    
    
    $
    6,890
    
    
    $
    16,001
    
    
    $
    11,916Earnings per share:Basic- as reported
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.36
    
    
    $
    0.28Basic- pro-forma
    
    $
    0.19
    
    
    $
    0.15
    
    
    $
    0.35
    
    
    $
    0.27Diluted  as reported
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.36
    
    
    $
    0.27Diluted  pro-forma
    
    $
    0.18
    
    
    $
    0.15
    
    
    $
    0.35
    
    
    $
    0.26
  7




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##### Table of Contents



2.
    
    SECURITIES
  June 30, 2005Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-SaleObligations of the U.S Treasury and other
U.S. government agencies
    
    $
    7,717
    
    
    $
    
    
    
    $
    (35
    )
    
    $
    7,682Obligations of states of the U.S. and
political subdivisions
    
    
    3,029
    
    
    
    57
    
    
    
    (1
    )
    
    
    3,085Mortgage-backed securities and collateralized
mortgage obligations
    
    
    550,383
    
    
    
    1,401
    
    
    
    (3,923
    )
    
    
    547,861Other securities
    
    
    14,842
    
    
    
    309
    
    
    
    (215
    )
    
    
    14,936Total
    
    $
    575,971
    
    
    $
    1,767
    
    
    $
    (4,174
    )
    
    $
    573,564Held-to-MaturityObligations of states of the U.S. and
political subdivisions
    
    $
    59,736
    
    
    $
    1,245
    
    
    $
    (173
    )
    
    $
    60,808Mortgage-backed securities and collateralized
mortgage obligations
    
    
    60,920
    
    
    
    65
    
    
    
    (438
    )
    
    
    60,547Total
    
    $
    120,656
    
    
    $
    1,310
    
    
    $
    (611
    )
    
    $
    121,355
 December 31, 2004Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-SaleObligations of the U.S Treasury and other
U.S. government agencies
    
    $
    8,254
    
    
    $
    
    
    
    $
    (60
    )
    
    $
    8,194Obligations of states of the U.S. and
political subdivisions
    
    
    4,035
    
    
    
    99
    
    
    
    (1
    )
    
    
    4,133Mortgage-backed securities and collateralized
mortgage obligations
    
    
    516,865
    
    
    
    2,112
    
    
    
    (2,652
    )
    
    
    516,325Other securities
    
    
    11,908
    
    
    
    354
    
    
    
    (210
    )
    
    
    12,052Total
    
    $
    541,062
    
    
    $
    2,565
    
    
    $
    (2,923
    )
    
    $
    540,704Held-to-MaturityObligations of states of the U.S. and
political subdivisions
    
    $
    61,956
    
    
    $
    1,928
    
    
    $
    (71
    )
    
    $
    63,813Mortgage-backed securities and collateralized
mortgage obligations
    
    
    55,458
    
    
    
    57
    
    
    
    (306
    )
    
    
    55,209Total
    
    $
    117,414
    
    
    $
    1,985
    
    
    $
    (377
    )
    
    $
    119,022
 8




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##### Table of Contents



Available-for-Sale
    
    
    Held-to-MaturityAmortized
    
    
    
    
    
    
    AmortizedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueDue in one year or less
    
    $
    1,318
    
    
    $
    1,314
    
    
    $
    4,802
    
    
    $
    4,846Due after one year through five years
    
    
    8,286
    
    
    
    8,279
    
    
    
    25,860
    
    
    
    26,822Due after five years through ten years
    
    
    1,142
    
    
    
    1,174
    
    
    
    28,503
    
    
    
    28,571Due after ten years
    
    
    
    
    
    
    
    
    
    
    571
    
    
    
    569Mortgage-backed securities and
collateralized mortgage obligations
    
    
    550,383
    
    
    
    547,861
    
    
    
    60,920
    
    
    
    60,547Other securities
    
    
    14,842
    
    
    
    14,936
    
    
    
    
    
    
    
    Total
    
    $
    575,971
    
    
    $
    573,564
    
    
    $
    120,656
    
    
    $
    121,355
  Three months ended June 30,
    
    
    Six months ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Proceeds from sales and calls
    
    $
    8,814
    
    
    $
    134,090
    
    
    $
    44,257
    
    
    $
    145,737Gross realized gains
    
    
    5
    
    
    
    4,981
    
    
    
    143
    
    
    
    5,124Gross realized losses
    
    
    (36
    )
    
    
    (853
    )
    
    
    (89
    )
    
    
    (853
    )
  June 30, 2005Less than 12 Months
    
    
    More than 12 MonthsGross
    
    
    
    
    
    
    
    
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    
    
    
    
    Amortized
    
    
    UnrealizedCost
    
    
    Losses
    
    
    Fair Value
    
    
    Cost
    
    
    Losses
    
    
    Fair ValueAvailable-for-SaleObligations of the U.S Treasury and other
U.S. government agencies
    
    $
    6,522
    
    
    $
    (15
    )
    
    $
    6,507
    
    
    $
    1,195
    
    
    $
    (20
    )
    
    $
    1,175Obligations of states of the U.S. and
political subdivisions
    
    
    242
    
    
    
    (1
    )
    
    
    241
    
    
    
    
    
    
    
    
    
    
    
    Mortgage-backed securities and collateralized
mortgage obligations
    
    
    374,165
    
    
    
    (3,544
    )
    
    
    370,622
    
    
    
    34,191
    
    
    
    (379
    )
    
    
    33,812Other securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,109
    
    
    
    (215
    )
    
    
    5,894Total
    
    $
    380,929
    
    
    $
    (3,560
    )
    
    $
    377,370
    
    
    $
    41,495
    
    
    $
    (614
    )
    
    $
    40,881Held-to-MaturityObligations of states of the U.S. and
political subdivisions
    
    $
    16,661
    
    
    $
    (173
    )
    
    $
    16,488
    
    
    $
    
    
    
    $
    
    
    
    $
    Mortgage-backed securities and collateralized
mortgage obligations
    
    
    53,454
    
    
    
    (438
    )
    
    
    53,016
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    70,115
    
    
    $
    (611
    )
    
    $
    69,504
    
    
    $
    
    
    
    $
    
    
    
    $
    
    9




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##### Table of Contents



3.
    
    LOANS
  June 30,
    
    
    December 31,2005
    
    
    2004Amount
    
    
    %
    
    
    Amount
    
    
    %Loans held for sale
    
    $
    9,195
    
    
    
    0.4
    %
    
    $
    6,881
    
    
    
    0.3
    %Loans held for investmentDomesticCommercial and industrial
    
    
    729,945
    
    
    
    28.2
    %
    
    
    682,209
    
    
    
    29.1
    %Real estate:Commercial
    
    
    1,134,882
    
    
    
    43.9
    %
    
    
    1,015,114
    
    
    
    43.3
    %Construction
    
    
    436,709
    
    
    
    16.9
    %
    
    
    363,044
    
    
    
    15.5
    %Residential mortgage
    
    
    172,488
    
    
    
    6.7
    %
    
    
    179,623
    
    
    
    7.7
    %Consumer/other
    
    
    68,711
    
    
    
    2.7
    %
    
    
    72,997
    
    
    
    3.1
    %ForeignCommercial and industrial
    
    
    28,264
    
    
    
    1.1
    %
    
    
    21,785
    
    
    
    0.9
    %Other loans
    
    
    3,451
    
    
    
    0.1
    %
    
    
    3,324
    
    
    
    0.1
    %Total loans held for investment
    
    
    2,574,450
    
    
    
    99.6
    %
    
    
    2,338,096
    
    
    
    99.7
    %Total loans
    
    $
    2,583,645
    
    
    
    100.0
    %
    
    $
    2,344,977
    
    
    
    100.0
    %
  Due AfterOne YearDue in One
    
    
    Through Five
    
    
    Due AfterYear or Less
    
    
    Years
    
    
    Five Years
    
    
    TotalCommercial and industrial
    
    $
    560,755
    
    
    $
    160,721
    
    
    $
    8,469
    
    
    $
    729,945Real estate  commercial
    
    
    744,914
    
    
    
    299,230
    
    
    
    90,738
    
    
    
    1,134,882Real estate  construction
    
    
    349,739
    
    
    
    77,760
    
    
    
    9,210
    
    
    
    436,709Foreign loans
    
    
    12,478
    
    
    
    19,229
    
    
    
    8
    
    
    
    31,715Total
    
    $
    1,667,886
    
    
    $
    556,940
    
    
    $
    108,425
    
    
    $
    2,333,251Loans with a fixed interest rate
    
    $
    129,192
    
    
    $
    486,333
    
    
    $
    93,402
    
    
    $
    708,927Loans with a floating interest rate
    
    
    1,538,694
    
    
    
    70,607
    
    
    
    15,023
    
    
    
    1,624,324Total
    
    $
    1,667,886
    
    
    $
    556,940
    
    
    $
    108,425
    
    
    $
    2,333,251
    10




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##### Table of Contents



4.
    
    ALLOWANCE FOR CREDIT LOSSES
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Allowance for loan losses at beginning of the period
    
    $
    30,760
    
    
    $
    25,534
    
    
    $
    29,406
    
    
    $
    30,722Loans charged-off
    
    
    3,269
    
    
    
    2,843
    
    
    
    5,634
    
    
    
    11,211Loan recoveries
    
    
    (1,409
    )
    
    
    (782
    )
    
    
    (1,796
    )
    
    
    (1,537
    )Net loans charged-off
    
    
    1,860
    
    
    
    2,061
    
    
    
    3,838
    
    
    
    9,674Provision for loan losses
    
    
    3,309
    
    
    
    2,656
    
    
    
    6,641
    
    
    
    5,081Allowance for loan losses at end of the period
    
    $
    32,209
    
    
    $
    26,129
    
    
    $
    32,209
    
    
    $
    26,129Reserve for losses on unfunded lending commitments at
beginning of period
    
    
    834
    
    
    
    1,075
    
    
    
    826
    
    
    
    Provision for losses on unfunded lending commitments
    
    
    (88
    )
    
    
    125
    
    
    
    (80
    )
    
    
    1,200Reserve for losses on unfunded lending commitments at
end of period
    
    
    746
    
    
    
    1,200
    
    
    
    746
    
    
    
    1,200Total allowance for credit losses
    
    $
    32,955
    
    
    $
    27,329
    
    
    $
    32,955
    
    
    $
    27,329
  5.
    
    GOODWILL AND OTHER INTANGIBLES
  Houston
    
    
    San Antonio
    
    
    Dallas
    
    
    TotalBalance, January 1, 2004
    
    $
    29,613
    
    
    $
    27,658
    
    
    $
    5,662
    
    
    $
    62,933Plaza Bank goodwill adjustments
    
    
    
    
    
    
    (453
    )
    
    
    
    
    
    
    (453
    )Balance, December 31, 2004
    
    
    29,613
    
    
    
    27,205
    
    
    
    5,662
    
    
    
    62,480Goodwill adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, June 30, 2005
    
    $
    29,613
    
    
    $
    27,205
    
    
    $
    5,662
    
    
    $
    62,480
  11




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##### Table of Contents



CoreDepositIntangiblesBalance, January 1, 2004
    
    $
    2,326Amortization expense
    
    
    (487
    )Balance, December 31, 2004
    
    
    1,839Amortization expense
    
    
    (214
    )Balance, June 30, 2005
    
    $
    1,625
 6.
    
    EARNINGS PER COMMON SHARE
  Three months ended June 30,
    
    
    Six months ended June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income
    
    $
    8,516
    
    
    $
    7,073
    
    
    $
    16,274
    
    
    $
    12,307Basic:Weighted average shares outstanding
    
    
    45,250
    
    
    
    44,796
    
    
    
    45,191
    
    
    
    44,748Diluted:Add incremental shares for:Assumed exercise of outstanding options
    
    
    463
    
    
    
    418
    
    
    
    473
    
    
    
    424Assumed conversion of preferred stock
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    20Total
    
    
    45,713
    
    
    
    45,234
    
    
    
    45,664
    
    
    
    45,192Earnings per share:Basic
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.36
    
    
    $
    0.28Diluted
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.36
    
    
    $
    0.27
  7.
    
    COMMITMENTS AND CONTINGENCIES
 Leases
 Litigation
 Severance and non-competition agreements
 12




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##### Table of Contents



8.
    
    FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
   June 30,
    
    December 31,2005
    
    2004Commitments to extend credit
    
    $
    729,752
    
    
    $
    657,740Standby letters of credit
    
    
    40,768
    
    
    
    28,435
    9.
    
    REGULATORY MATTERS
 Capital requirements 
   13




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##### Table of Contents



To Be Categorized asWell Capitalized UnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(In thousands, except percentage amounts)CONSOLIDATED:As of June 30, 2005:Total capital (to risk weighted assets)
    
    $
    422,843
    
    
    
    13.6
    %
    
    $
    248,091
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    N/ATier 1 capital (to risk weighted assets)
    
    
    342,678
    
    
    
    11.1
    %
    
    
    124,045
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/ATier 1 capital (to average assets)
    
    
    342,678
    
    
    
    9.9
    %
    
    
    139,119
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/AAs of December 31, 2004:Total capital (to risk weighted assets)
    
    $
    406,343
    
    
    
    14.6
    %
    
    $
    223,457
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    N/ATier 1 capital (to risk weighted assets)
    
    
    328,948
    
    
    
    11.8
    %
    
    
    111,729
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/ATier 1 capital (to average assets)
    
    
    328,948
    
    
    
    10.1
    %
    
    
    129,625
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/ASTERLING BANK:As of June 30, 2005:Total capital (to risk weighted assets)
    
    $
    417,324
    
    
    
    13.5
    %
    
    $
    247,617
    
    
    
    8.0
    %
    
    $
    309,521
    
    
    
    10.0
    %Tier 1 capital (to risk weighted assets)
    
    
    337,160
    
    
    
    10.9
    %
    
    
    123,808
    
    
    
    4.0
    %
    
    
    185,713
    
    
    
    6.0
    %Tier 1 capital (to average assets)
    
    
    337,160
    
    
    
    9.7
    %
    
    
    138,879
    
    
    
    4.0
    %
    
    
    173,598
    
    
    
    5.0
    %As of December 31, 2004:Total capital (to risk weighted assets)
    
    $
    399,808
    
    
    
    14.3
    %
    
    $
    222,987
    
    
    
    8.0
    %
    
    $
    278,734
    
    
    
    10.0
    %Tier 1 capital (to risk weighted assets)
    
    
    322,413
    
    
    
    11.6
    %
    
    
    111,494
    
    
    
    4.0
    %
    
    
    167,241
    
    
    
    6.0
    %Tier 1 capital (to average assets)
    
    
    322,413
    
    
    
    9.9
    %
    
    
    129,387
    
    
    
    4.0
    %
    
    
    161,733
    
    
    
    5.0
    %
  Dividend restrictions 
 10.
    
    SUBSEQUENT EVENTS
  14




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
   
    
    general business and economic conditions in the markets we serve may be less favorable
than anticipated which could decrease the demand for loan, deposit and other financial
services and increase loan delinquencies and defaults;
    
    our ability to integrate acquisitions and realize expected cost savings and revenue
enhancements from acquisitions;
    
    changes in market rates and prices may adversely impact the value of securities, loans,
deposits and other financial instruments and the interest rate sensitivity of our balance
sheet;
    
    our liquidity requirements could be adversely affected by changes in our assets and
liabilities;
    
    the effect of legislative or regulatory developments including changes in laws
concerning taxes, banking, securities, insurance and other aspects of the financial
securities industry;
    
    competitive factors among financial services organizations, including product and
pricing pressures and our ability to attract, develop and retain qualified banking
professionals;
    
    the effect of changes in accounting policies and practices, as may be adopted by the
Financial Accounting Standards Board, the Securities and Exchange Commission, the Public
Company Accounting Oversight Board and other regulatory agencies; and
    
    the effect of fiscal and governmental policies of the United States federal government.
   OVERVIEW
  15




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES
    RECENT ACCOUNTING STANDARDS
 The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments . The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain investments
 SFAS No. 123R, Share-Based Payment (Revised 2004)
 16




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##### Table of Contents



Accounting
Changes and Error Corrections
 17




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##### Table of Contents



SELECTED FINANCIAL DATA
 Three Months Ended
    
    
    Six Months Ended
    
    
    Year EndedJune 30,
    
    
    June 30,
    
    
    December 31,2005
    
    
    2004
    
    
    2005
    
    
    2004
    
    
    2004(Dollars and shares in thousands, except for per share amounts)INCOME STATEMENT DATA:Net interest income
    
    $
    38,246
    
    
    $
    32,290
    
    
    $
    74,929
    
    
    $
    65,255
    
    
    $
    135,160Provision for credit losses
    
    
    3,221
    
    
    
    2,781
    
    
    
    6,561
    
    
    
    6,281
    
    
    
    12,250Noninterest income
    
    
    6,488
    
    
    
    10,775
    
    
    
    13,162
    
    
    
    17,977
    
    
    
    30,900Noninterest expense
    
    
    29,134
    
    
    
    30,027
    
    
    
    57,837
    
    
    
    59,018
    
    
    
    119,363Income before income taxes
    
    
    12,379
    
    
    
    10,257
    
    
    
    23,693
    
    
    
    17,933
    
    
    
    34,447Net income
    
    
    8,516
    
    
    
    7,073
    
    
    
    16,274
    
    
    
    12,307
    
    
    
    24,963BALANCE SHEET DATA(at period-end):Total assets
    
    $
    3,591,433
    
    
    $
    3,091,408
    
    
    $
    3,591,433
    
    
    $
    3,091,408
    
    
    $
    3,336,896Total loans
    
    
    2,583,645
    
    
    
    2,167,484
    
    
    
    2,583,645
    
    
    
    2,167,484
    
    
    
    2,344,977Allowance for loan losses
    
    
    32,209
    
    
    
    26,129
    
    
    
    32,209
    
    
    
    26,129
    
    
    
    29,406Total securities
    
    
    694,220
    
    
    
    519,172
    
    
    
    694,220
    
    
    
    519,172
    
    
    
    658,118Trading assets
    
    
    15,556
    
    
    
    92,751
    
    
    
    15,556
    
    
    
    92,751
    
    
    
    36,720Total deposits
    
    
    2,605,180
    
    
    
    2,488,605
    
    
    
    2,605,180
    
    
    
    2,488,605
    
    
    
    2,443,967Short-term borrowings
    
    
    503,725
    
    
    
    149,750
    
    
    
    503,725
    
    
    
    149,750
    
    
    
    420,575Subordinated debt
    
    
    47,956
    
    
    
    45,254
    
    
    
    47,956
    
    
    
    45,254
    
    
    
    47,162Junior subordinated debt
    
    
    82,475
    
    
    
    82,475
    
    
    
    82,475
    
    
    
    82,475
    
    
    
    82,475Shareholders equity
    
    
    325,358
    
    
    
    297,264
    
    
    
    325,358
    
    
    
    297,264
    
    
    
    313,172COMMON SHARE DATA:Earnings per share (1)Basic
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.36
    
    
    $
    0.28
    
    
    $
    0.56Diluted
    
    
    0.19
    
    
    
    0.16
    
    
    
    0.36
    
    
    
    0.27
    
    
    
    0.55Shares used in computing earnings per common
shareBasic
    
    
    45,250
    
    
    
    44,796
    
    
    
    45,191
    
    
    
    44,748
    
    
    
    44,839Diluted
    
    
    45,713
    
    
    
    45,234
    
    
    
    45,664
    
    
    
    45,192
    
    
    
    45,278End of period common shares outstanding
    
    
    45,283
    
    
    
    44,853
    
    
    
    45,283
    
    
    
    44,853
    
    
    
    45,068Book value
per common share at period-endTotal
    
    $
    7.19
    
    
    $
    6.62
    
    
    $
    7.19
    
    
    $
    6.62
    
    
    $
    6.95Tangible
    
    
    5.77
    
    
    
    5.18
    
    
    
    5.77
    
    
    
    5.18
    
    
    
    5.52Cash dividends paid per common share
    
    
    0.060
    
    
    
    0.050
    
    
    
    0.120
    
    
    
    0.100
    
    
    
    0.200Common stock dividend payout ratio
    
    
    31.88
    %
    
    
    31.66
    %
    
    
    33.32
    %
    
    
    36.34
    %
    
    
    35.91
    %SELECTED PERFORMANCE RATIOS AND OTHER DATA:Return on average common equity (2)
    
    
    10.55
    %
    
    
    9.45
    %
    
    
    10.22
    %
    
    
    8.28
    %
    
    
    8.23
    %Return on average assets (2)
    
    
    0.97
    %
    
    
    0.91
    %
    
    
    0.95
    %
    
    
    0.78
    %
    
    
    0.78
    %Net interest margin
    
    
    4.75
    %
    
    
    4.55
    %
    
    
    4.79
    %
    
    
    4.56
    %
    
    
    4.64
    %Efficiency ratio
    
    
    65.13
    %
    
    
    69.73
    %
    
    
    65.66
    %
    
    
    70.91
    %
    
    
    71.88
    %Full-time equivalent employees
    
    
    951
    
    
    
    1024
    
    
    
    951
    
    
    
    1024
    
    
    
    961Number of banking offices
    
    
    35
    
    
    
    37
    
    
    
    35
    
    
    
    37
    
    
    
    36LIQUIDITY AND CAPITAL RATIOS:Average loans to average deposits
    
    
    98.09
    %
    
    
    87.56
    %
    
    
    97.19
    %
    
    
    87.45
    %
    
    
    89.32
    %Period-end shareholders equity to total assets
    
    
    9.06
    %
    
    
    9.62
    %
    
    
    9.06
    %
    
    
    9.62
    %
    
    
    9.39
    %Average shareholders equity to average assets
    
    
    9.18
    %
    
    
    9.61
    %
    
    
    9.29
    %
    
    
    9.47
    %
    
    
    9.52
    %Period-end tangible capital to total tangible
assets
    
    
    7.41
    %
    
    
    7.69
    %
    
    
    7.41
    %
    
    
    7.69
    %
    
    
    7.61
    %Tier 1 capital to risk-weighted assets
    
    
    11.05
    %
    
    
    12.58
    %
    
    
    11.05
    %
    
    
    12.58
    %
    
    
    11.78
    %Total capital to risk-weighted assets
    
    
    13.64
    %
    
    
    15.46
    %
    
    
    13.64
    %
    
    
    15.46
    %
    
    
    14.55
    %Tier 1 leverage ratio (Tier 1 capital to
average assets)
    
    
    9.85
    %
    
    
    10.30
    %
    
    
    9.85
    %
    
    
    10.30
    %
    
    
    10.15
    %ASSET QUALITY RATIOS:Period-end allowance for credit losses to
period-end loans
    
    
    1.28
    %
    
    
    1.26
    %
    
    
    1.28
    %
    
    
    1.26
    %
    
    
    1.29
    %Period-end allowance for loan losses to
period-end loans
    
    
    1.25
    %
    
    
    1.21
    %
    
    
    1.25
    %
    
    
    1.21
    %
    
    
    1.25
    %Net charge-offs to average loans (2)
    
    
    0.30
    %
    
    
    0.38
    %
    
    
    0.32
    %
    
    
    0.90
    %
    
    
    0.58
    %Period-end allowance for loan losses to
nonperforming loans
    
    
    174.09
    %
    
    
    241.80
    %
    
    
    174.09
    %
    
    
    241.80
    %
    
    
    142.71
    %Nonperforming assets to period-end loans and
foreclosed assets
    
    
    0.78
    %
    
    
    0.63
    %
    
    
    0.78
    %
    
    
    0.63
    %
    
    
    0.95
    %Nonperforming loans to period-end loans
    
    
    0.72
    %
    
    
    0.50
    %
    
    
    0.72
    %
    
    
    0.50
    %
    
    
    0.88
    %Nonperforming assets to period-end assets
    
    
    0.56
    %
    
    
    0.44
    %
    
    
    0.56
    %
    
    
    0.44
    %
    
    
    0.67
    %
   18




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##### Table of Contents



RESULTS OF OPERATIONS
 Net Income 
   Net
Interest Income
       19




---



##### Table of Contents



20




---



##### Table of Contents







Three Months Ended June 30,2005
    
    
    2004Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Yield/Rate
    
    
    Balance
    
    
    Interest
    
    
    Yield/RateInterest-earning assets:Loans held for sale (1)
    
    $
    11,448
    
    
    $
    200
    
    
    
    7.02
    %
    
    $
    11,568
    
    
    $
    187
    
    
    
    6.50
    %Loans held for investment (1):Taxable
    
    
    2,488,633
    
    
    
    43,395
    
    
    
    6.99
    %
    
    
    2,144,582
    
    
    
    32,771
    
    
    
    6.15
    %Non-taxable
    
    
    2,343
    
    
    
    39
    
    
    
    6.65
    %
    
    
    4,064
    
    
    
    65
    
    
    
    6.43
    %Securities:Taxable
    
    
    616,753
    
    
    
    6,345
    
    
    
    4.13
    %
    
    
    529,652
    
    
    
    4,977
    
    
    
    3.78
    %Non-taxable
    
    
    62,945
    
    
    
    612
    
    
    
    3.90
    %
    
    
    42,817
    
    
    
    464
    
    
    
    4.36
    %Trading assets
    
    
    28,944
    
    
    
    322
    
    
    
    4.46
    %
    
    
    113,392
    
    
    
    991
    
    
    
    3.52
    %Federal funds sold
    
    
    16,880
    
    
    
    122
    
    
    
    2.89
    %
    
    
    9,709
    
    
    
    23
    
    
    
    0.94
    %Deposits in financial institutions
    
    
    770
    
    
    
    6
    
    
    
    3.18
    %
    
    
    1,874
    
    
    
    16
    
    
    
    3.39
    %Total interest-earning assets
    
    
    3,228,716
    
    
    
    51,041
    
    
    
    6.34
    %
    
    
    2,857,658
    
    
    
    39,494
    
    
    
    5.56
    %Noninterest-earning assets:Cash and due from banks
    
    
    89,617
    
    
    
    
    
    
    
    
    
    
    
    98,580Premises and equipment, net
    
    
    39,045
    
    
    
    
    
    
    
    
    
    
    
    47,744Other assets
    
    
    199,954
    
    
    
    
    
    
    
    
    
    
    
    157,619Allowance for loan losses
    
    
    (31,097
    )
    
    
    
    
    
    
    
    
    
    
    (25,981
    )Total noninterest-earning assets
    
    
    297,519
    
    
    
    
    
    
    
    
    
    
    
    277,962Total assets
    
    $
    3,526,235
    
    
    
    
    
    
    
    
    
    
    $
    3,135,620Interest bearing liabilities:Deposits:Demand and savings
    
    $
    959,832
    
    
    $
    1,853
    
    
    
    0.77
    %
    
    $
    934,732
    
    
    $
    1,080
    
    
    
    0.46
    %Certificates and other time
    
    
    680,948
    
    
    
    4,669
    
    
    
    2.75
    %
    
    
    713,283
    
    
    
    3,275
    
    
    
    1.85
    %Short-term borrowings
    
    
    493,464
    
    
    
    3,669
    
    
    
    2.98
    %
    
    
    212,123
    
    
    
    586
    
    
    
    1.11
    %Subordinated debt
    
    
    46,985
    
    
    
    882
    
    
    
    7.53
    %
    
    
    46,298
    
    
    
    646
    
    
    
    5.61
    %Junior subordinated debt
    
    
    82,475
    
    
    
    1,722
    
    
    
    8.37
    %
    
    
    82,475
    
    
    
    1,617
    
    
    
    7.89
    %Total interest-bearing liabilities
    
    
    2,263,704
    
    
    
    12,795
    
    
    
    2.27
    %
    
    
    1,988,911
    
    
    
    7,204
    
    
    
    1.46
    %Noninterest-bearing sources:Demand deposits
    
    
    910,448
    
    
    
    
    
    
    
    
    
    
    
    819,189Other liabilities
    
    
    28,322
    
    
    
    
    
    
    
    
    
    
    
    26,319Total noninterest-bearing liabilities
    
    
    938,770
    
    
    
    
    
    
    
    
    
    
    
    845,508Shareholders equity
    
    
    323,761
    
    
    
    
    
    
    
    
    
    
    
    301,201Total liabilities and shareholders equity
    
    $
    3,526,235
    
    
    
    
    
    
    
    
    
    
    $
    3,135,620Net interest income & margin
    
    
    
    
    
    $
    38,246
    
    
    
    4.75
    %
    
    
    
    
    
    $
    32,290
    
    
    
    4.55
    %


(1)
    
    For the purpose of calculating loan yields, average loan balances include nonaccrual loans
with no related interest income.


21



---



##### Table of Contents



Six Months Ended June 30,2005
    
    
    2004Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Yield/Rate
    
    
    Balance
    
    
    Interest
    
    
    Yield/RateInterest-earning assets:Loans held for sale (1)
    
    $
    9,808
    
    
    $
    347
    
    
    
    7.13
    %
    
    $
    10,389
    
    
    $
    315
    
    
    
    6.10
    %Loans held for investment (1):Taxable
    
    
    2,428,303
    
    
    
    83,064
    
    
    
    6.90
    %
    
    
    2,143,833
    
    
    
    65,810
    
    
    
    6.17
    %Non-taxable
    
    
    2,713
    
    
    
    104
    
    
    
    7.73
    %
    
    
    4,126
    
    
    
    132
    
    
    
    6.43
    %Securities:Taxable
    
    
    607,403
    
    
    
    12,500
    
    
    
    4.15
    %
    
    
    528,857
    
    
    
    9,997
    
    
    
    3.80
    %Non-taxable
    
    
    63,951
    
    
    
    1,240
    
    
    
    3.91
    %
    
    
    42,157
    
    
    
    919
    
    
    
    4.38
    %Trading assets
    
    
    28,368
    
    
    
    634
    
    
    
    4.51
    %
    
    
    138,600
    
    
    
    2,453
    
    
    
    3.56
    %Federal funds sold
    
    
    11,607
    
    
    
    159
    
    
    
    2.77
    %
    
    
    10,312
    
    
    
    43
    
    
    
    0.84
    %Deposits in financial institutions
    
    
    994
    
    
    
    15
    
    
    
    3.10
    %
    
    
    1,677
    
    
    
    31
    
    
    
    3.69
    %Total interest-earning assets
    
    
    3,153,147
    
    
    
    98,063
    
    
    
    6.27
    %
    
    
    2,879,951
    
    
    
    79,700
    
    
    
    5.57
    %Noninterest-earning assets:Cash and due from banks
    
    
    95,930
    
    
    
    
    
    
    
    
    
    
    
    101,779Premises and equipment, net
    
    
    39,472
    
    
    
    
    
    
    
    
    
    
    
    48,299Other assets
    
    
    198,100
    
    
    
    
    
    
    
    
    
    
    
    157,139Allowance for loan losses
    
    
    (30,801
    )
    
    
    
    
    
    
    
    
    
    
    (28,593
    )Total noninterest-earning assets
    
    
    302,701
    
    
    
    
    
    
    
    
    
    
    
    278,624Total assets
    
    $
    3,455,848
    
    
    
    
    
    
    
    
    
    
    $
    3,158,575Interest-bearing liabilities:Deposits:Demand and savings
    
    $
    984,459
    
    
    $
    3,627
    
    
    
    0.74
    %
    
    $
    937,869
    
    
    $
    2,033
    
    
    
    0.44
    %Certificates and other time
    
    
    636,635
    
    
    
    8,041
    
    
    
    2.55
    %
    
    
    716,452
    
    
    
    6,640
    
    
    
    1.86
    %Other borrowed funds
    
    
    465,660
    
    
    
    6,359
    
    
    
    2.75
    %
    
    
    229,958
    
    
    
    1,267
    
    
    
    1.11
    %Subordinated debt
    
    
    47,020
    
    
    
    1,695
    
    
    
    7.27
    %
    
    
    46,705
    
    
    
    1,267
    
    
    
    5.46
    %Junior subordinated debt
    
    
    82,475
    
    
    
    3,412
    
    
    
    8.34
    %
    
    
    82,475
    
    
    
    3,238
    
    
    
    7.90
    %Total interest-bearing liabilities
    
    
    2,216,249
    
    
    
    23,134
    
    
    
    2.11
    %
    
    
    2,013,459
    
    
    
    14,445
    
    
    
    1.44
    %Noninterest-bearing sources:Demand deposits
    
    
    890,365
    
    
    
    
    
    
    
    
    
    
    
    813,649Other liabilities
    
    
    28,159
    
    
    
    
    
    
    
    
    
    
    
    32,340Total noninterest-bearing liabilities
    
    
    918,524
    
    
    
    
    
    
    
    
    
    
    
    845,989Shareholders equity
    
    
    321,075
    
    
    
    
    
    
    
    
    
    
    
    299,127Total liabilities and shareholders
equity
    
    $
    3,455,848
    
    
    
    
    
    
    
    
    
    
    $
    3,158,575Net interest income & margin
    
    
    
    
    
    $
    74,929
    
    
    
    4.79
    %
    
    
    
    
    
    $
    65,255
    
    
    
    4.56
    %
  22




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##### Table of Contents



Noninterest Income 
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30, 2005
    
    
    June 30, 2004
    
    
    June 30, 2005
    
    
    June 30, 2004Customer service fees
    
    $
    2,888
    
    
    $
    3,794
    
    
    $
    5,880
    
    
    $
    7,815Net gain (loss) on trading assets
    
    
    (11
    )
    
    
    152
    
    
    
    98
    
    
    
    485Net gain (loss) on the sale of securities
    
    
    (31
    )
    
    
    4,128
    
    
    
    54
    
    
    
    4,271Bank owned life insurance
    
    
    723
    
    
    
    472
    
    
    
    1,434
    
    
    
    945Debit card income
    
    
    433
    
    
    
    408
    
    
    
    849
    
    
    
    765Other
    
    
    2,486
    
    
    
    1,821
    
    
    
    4,847
    
    
    
    3,696$
    6,488
    
    
    $
    10,775
    
    
    $
    13,162
    
    
    $
    17,977
     Noninterest Expense 
 For the Three Months Ended
    
    
    For the Six Months EndedJune 30, 2005
    
    
    June 30, 2004
    
    
    June 30, 2005
    
    
    June 30, 2004Salaries and employee benefits
    
    $
    16,938
    
    
    $
    17,175
    
    
    $
    34,119
    
    
    $
    34,862Occupancy expense
    
    
    3,909
    
    
    
    3,743
    
    
    
    7,551
    
    
    
    7,340Technology
    
    
    1,381
    
    
    
    1,537
    
    
    
    2,595
    
    
    
    2,925Professional fees
    
    
    1,630
    
    
    
    1,395
    
    
    
    2,926
    
    
    
    2,457Postage, delivery and supplies
    
    
    778
    
    
    
    816
    
    
    
    1,528
    
    
    
    1,691Marketing
    
    
    617
    
    
    
    539
    
    
    
    1,262
    
    
    
    925Core deposit intangibles amortization
    
    
    102
    
    
    
    124
    
    
    
    214
    
    
    
    248Net losses and carrying costs of
other real estate and foreclosed property
    
    
    41
    
    
    
    194
    
    
    
    97
    
    
    
    213Other
    
    
    3,738
    
    
    
    4,504
    
    
    
    7,545
    
    
    
    8,357$
    29,134
    
    
    $
    30,027
    
    
    $
    57,837
    
    
    $
    59,018
   23




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##### Table of Contents



Income Taxes 
 FINANCIAL CONDITION
 Loans Held for Investment 
 June 30, 2005
    
    
    December 31, 2004Amount
    
    
    %
    
    
    Amount
    
    
    %Commercial and industrial
    
    $
    729,945
    
    
    
    28.4
    %
    
    $
    682,209
    
    
    
    29.2
    %Real estate:Commercial
    
    
    1,134,882
    
    
    
    44.0
    %
    
    
    1,015,114
    
    
    
    43.4
    %Construction
    
    
    436,709
    
    
    
    17.0
    %
    
    
    363,044
    
    
    
    15.5
    %Residential mortgage
    
    
    172,488
    
    
    
    6.7
    %
    
    
    179,623
    
    
    
    7.7
    %Consumer/other
    
    
    68,711
    
    
    
    2.7
    %
    
    
    72,997
    
    
    
    3.1
    %Foreign loans
    
    
    31,715
    
    
    
    1.2
    %
    
    
    25,109
    
    
    
    1.1
    %Total loans held for investment
    
    $
    2,574,450
    
    
    
    100.0
    %
    
    $
    2,338,096
    
    
    
    100.0
    %
    Loans
Held for Sale 
 Trading
Assets 
 Securities 
 24




---



##### Table of Contents



Deposits 
 June 30, 2005
    
    
    December 31, 2004Amount
    
    
    %
    
    
    Amount
    
    
    %Noninterest-bearing demand
    
    $
    928,564
    
    
    
    35.7
    %
    
    $
    884,017
    
    
    
    36.2
    %Interest-bearing demand
    
    
    961,134
    
    
    
    36.9
    %
    
    
    970,281
    
    
    
    39.7
    %Certificates and other time depositsJumbo
    
    
    451,394
    
    
    
    17.3
    %
    
    
    345,785
    
    
    
    14.1
    %Regular
    
    
    221,325
    
    
    
    8.5
    %
    
    
    197,561
    
    
    
    8.1
    %Brokered
    
    
    42,763
    
    
    
    1.6
    %
    
    
    46,323
    
    
    
    1.9
    %Total deposits
    
    $
    2,605,180
    
    
    
    100.0
    %
    
    $
    2,443,967
    
    
    
    100.0
    %
  Short-term
borrowings 
 ASSET QUALITY
 Risk Elements 
 25




---



##### Table of Contents



June 30,
    
    
    December 31,2005
    
    
    2004Nonperforming loans:Nonaccrual
    
    $
    18,450
    
    
    $
    20,605Restructured
    
    
    51
    
    
    
    Real estate acquired by foreclosure
    
    
    1,472
    
    
    
    1,536Other repossessed assets
    
    
    232
    
    
    
    216Total nonperforming assets
    
    $
    20,205
    
    
    $
    22,357Potential problem loans
    
    $
    58,817
    
    
    $
    54,293Accruing loans past due 90 days or more
    
    $
    1,629
    
    
    $
    2,395Period-end allowance for loan losses to
nonperforming loans
    
    
    174.09
    %
    
    
    142.71
    %Nonperforming loans to period-end loans
    
    
    0.72
    %
    
    
    0.88
    %Nonperforming assets to period-end assets
    
    
    0.56
    %
    
    
    0.67
    %Nonperforming assets to period-end loans and
foreclosed assets
    
    
    0.78
    %
    
    
    0.95
    %
  Allowance for Credit Losses 
    26




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Allowance for loan losses at beginning of period
    
    $
    30,760
    
    
    $
    25,534
    
    
    $
    29,406
    
    
    $
    30,722Charge-offs:Commercial, financial, and industrial
    
    
    1,881
    
    
    
    1,906
    
    
    
    3,220
    
    
    
    7,480Real estate, mortgage and construction
    
    
    1,065
    
    
    
    719
    
    
    
    1,576
    
    
    
    3,014Consumer
    
    
    323
    
    
    
    218
    
    
    
    838
    
    
    
    717Total charge-offs
    
    
    3,269
    
    
    
    2,843
    
    
    
    5,634
    
    
    
    11,211RecoveriesCommercial, financial, and industrial
    
    
    721
    
    
    
    732
    
    
    
    1,034
    
    
    
    1,318Real estate, mortgage and construction
    
    
    605
    
    
    
    9
    
    
    
    610
    
    
    
    100Consumer
    
    
    83
    
    
    
    41
    
    
    
    152
    
    
    
    119Total recoveries
    
    
    1,409
    
    
    
    782
    
    
    
    1,796
    
    
    
    1,537Net charge-offs
    
    
    1,860
    
    
    
    2,061
    
    
    
    3,838
    
    
    
    9,674Provision for loan losses
    
    
    3,309
    
    
    
    2,656
    
    
    
    6,641
    
    
    
    5,081Allowance for loan losses at end of period
    
    $
    32,209
    
    
    $
    26,129
    
    
    $
    32,209
    
    
    $
    26,129Reserve for losses on unfunded lending commitments at
beginning of period
    
    
    834
    
    
    
    1,075
    
    
    
    826
    
    
    
    Provision for losses on unfunded lending commitments
    
    
    (88
    )
    
    
    125
    
    
    
    (80
    )
    
    
    1,200Reserve for losses on unfunded lending commitments at
end of period
    
    
    746
    
    
    
    1,200
    
    
    
    746
    
    
    
    1,200Total allowance for credit losses
    
    $
    32,955
    
    
    $
    27,329
    
    
    $
    32,955
    
    
    $
    27,329
 INTEREST RATE SENSITIVITY
     27




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##### Table of Contents





IncreaseChanges in
    
    (Decrease) inInterest Rates
    
    Net Interest(Basis Points)
    
    IncomeJune 30, 2005+200
    
    
    6.15
    %+100
    
    
    3.31
    %Base
    
    
    0.00
    %-100
    
    
    -5.18
    %-200
    
    
    -11.13
    %December 31, 2004+200
    
    
    5.96
    %+100
    
    
    3.14
    %Base
    
    
    0.00
    %-100
    
    
    -5.43
    %-200
    
    
    -6.69
    %




CAPITAL RESOURCES AND LIQUIDITY


Capital Resources 


For Minimum CapitalActual
    
    Adequacy PurposesAmount
    
    Ratio
    
    Amount
    
    RatioTotal capital (to risk weighted assets)
    
    $
    422,843
    
    
    
    13.6
    %
    
    $
    248,091
    
    
    
    8.0
    %Tier 1 capital (to risk weighted assets)
    
    
    342,678
    
    
    
    11.1
    %
    
    
    124,045
    
    
    
    4.0
    %Tier 1 capital (to average assets)
    
    
    342,678
    
    
    
    9.9
    %
    
    
    139,119
    
    
    
    4.0
    %


Liquidity 


28




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##### Table of Contents












ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.







ITEM 4. CONTROLS AND PROCEDURES.


Evaluation of Disclosure Controls and Procedures


Changes in Internal Control Over Financial Reporting





PART II. OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS.







ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.







ITEM 3. DEFAULTS UPON SENIOR SECURITIES.







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








29



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##### Table of Contents



For
    
    WithheldGeorge Beatty, Jr
    
    
    38,826,560
    
    
    
    2,059,519Anat Bird
    
    
    39,197,052
    
    
    
    1,689,027Thomas A. Reiser
    
    
    37,927,108
    
    
    
    2,958,971Steven F. Retzloff
    
    
    39,453,006
    
    
    
    1,433,073
  J. Downey Bridgwater
    
    James J. KearneyJames D. Calaway
    
    R. Bruce LaBoonBruce J. Harper
    
    George MartinezDavid L. Hatcher
    
    G. Edward PowellGlenn H. Johnson
    
    Raimundo Riojas E.
  For37,806,003
    
    Against3,076,110
    
    Abstain3,964
 
 ITEM 5. OTHER INFORMATION.
  
 ITEM 6. EXHIBITS.
  +10.1 
    
    Severance and Non-Competition Agreement dated effective May 2,
2005, by and among Sterling Bancshares, Inc., Sterling Bank, and Sonny Lyles.
[Incorporated by reference to Exhibit 10.1 of the Companys Current Report on
Form 8-K filed on May 5, 2005 (File No. 000-20750).]+10.2 
    
    Summary Description of Named Executive Compensation.
[Incorporated by reference to Exhibit 10.1 of the Companys Current Report on
Form 8-K filed on April 29, 2005 (File No. 000-20750).]+10.3 
    
    Summary Description of Non-Employee Director Compensation.
[Incorporated by reference to Exhibit 10.2 of the Companys Current Report on
Form 8-K filed on April 29, 2005 (File No. 000-20750).]11    
    
    Statement Regarding Computation of Earnings Per Share
(included as Note (6) to Consolidated Financial Statements on page 12 of this
Quarterly Report on Form 10-Q).*31.1 
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of J.
Downey Bridgwater, President and Chief Executive Officer.*31.2 
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of
Stephen C. Raffaele, Executive Vice President and Chief Financial Officer.**32.1 
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 30




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##### Table of Contents



**32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    As filed herewith.**
    
    As furnished herewith.+
    
    Management Compensation Agreement. 31




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##### Table of Contents



SIGNATURES
  STERLING BANCSHARES, INC.Date: August 5, 2005
    By:
    /s/ J. Downey BridgwaterJ. Downey BridgwaterPresident and
Chief Executive Officer
(Principal executive officer) Date: August 5, 2005
    By:
    /s/ Stephen C. RaffaeleStephen C. RaffaeleExecutive Vice President
and Chief Financial Officer
(Principal financial and accounting officer) 32




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    Description+10.1 
    
    Severance and Non-Competition Agreement dated effective May 2, 2005, by and among
Sterling Bancshares, Inc., Sterling Bank, and Sonny Lyles. [Incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K filed on May 5, 2005 (File No.
000-20750).]+10.2 
    
    Summary Description of Named Executive Compensation. [Incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K filed on April 29, 2005 (File No.
000-20750).]+10.3 
    
    Summary Description of Non-Employee Director Compensation. [Incorporated by reference
to Exhibit 10.2 of the Companys Current Report on Form 8-K filed on April 29, 2005 (File No.
000-20750).]11 
    
    Statement Regarding Computation of Earnings Per Share (included as Note (6) to
Consolidated Financial Statements on page 12 of this Quarterly Report on Form 10-Q).*31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of J. Downey Bridgwater, President and Chief Executive
Officer.*31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of Stephen C. Raffaele, Executive Vice President and Chief
Financial Officer.**32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.**32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
 *
    
    As filed herewith.**
    
    As furnished herewith.+
    
    Management Compensation Agreement. 33