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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from             to

Commission file number: 0-20750

STERLING
BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Texas                                                          |  | 74-2175590                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|2550 North Loop West, Suite 600 Houston, Texas                 |  | 77092                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

713-466-8300

(Registrants telephone number, including area code)

[None]

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act

Large accelerated filer  x                    Accelerated
filer ̈Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).

Yes ̈No  x

Indicate the number of shares outstanding of each of
the issuers classes of common stock, as of the latest practicable date.



|                                          |  |                              
|----------------------------------------- |  | -----------------------------
|Class                                     |  | Outstanding at August 1, 2006
|[Common Stock, $1.00 par value per share] |  | 45,787,901 shares            



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##### Table of Contents

STERLING BANCSHARES, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2006

TABLE OF CONTENTS



|           |  |                                                                                       |  |   
|---------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I.    |  | FINANCIAL INFORMATION                                                                 |  |   
|Item 1.    |  | Financial Statements                                                                  |  | 2 
|           |  | Consolidated Balance Sheets                                                           |  | 2 
|           |  | Consolidated Statements of Income                                                     |  | 3 
|           |  | Consolidated Statements of Shareholders Equity                                       |  | 4 
|           |  | Consolidated Statements of Cash Flows                                                 |  | 5 
|           |  | Notes to Consolidated Financial Statements                                            |  | 6 
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 19
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 33
|Item 4.    |  | Controls and Procedures                                                               |  | 33
|           |  |                                                                                      
|PART II.   |  | OTHER INFORMATION                                                                     |  |   
|Item 1.    |  | Legal Proceedings                                                                     |  | 34
|Item 1A.   |  | Risk Factors                                                                          |  | 34
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 34
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 34
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 34
|Item 5.    |  | Other Information                                                                     |  | 35
|Item 6.    |  | Exhibits                                                                              |  | 35
|           | 
|SIGNATURES |  | 36                                                                                   



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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 per share amounts)



|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                           |  | June 30,2006 |           |   | December 31,2005 |  
|ASSETS                                                                                                                                                                                     |  |              |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                                                  |  | $            | 106,531   |   |                  | $ | 147,154   |  
|Interest-bearing deposits in financial institutions                                                                                                                                        |  |              | 99        |   |                  |   | 99        |  
|Trading assets                                                                                                                                                                             |  |              |          |   |                  |   | 28,515    |  
|Available-for-sale securities, at fair value                                                                                                                                               |  |              | 455,122   |   |                  |   | 495,945   |  
|Held-to-maturity securities, at amortized cost                                                                                                                                             |  |              | 120,153   |   |                  |   | 123,053   |  
|Loans held for sale                                                                                                                                                                        |  |              | 24,215    |   |                  |   | 8,354     |  
|Loans held for investment                                                                                                                                                                  |  |              | 2,856,661 |   |                  |   | 2,691,008 |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total loans                                                                                                                                                                                |  |              | 2,880,876 |   |                  |   | 2,699,362 |  
|Allowance for loan losses                                                                                                                                                                  |  |              | (31,882   | ) |                  |   | (31,230   | )
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Loans, net                                                                                                                                                                                 |  |              | 2,848,994 |   |                  |   | 2,668,132 |  
|                                                                                                                                                                                           |  |             
|Premises and equipment, net                                                                                                                                                                |  |              | 37,169    |   |                  |   | 41,407    |  
|Real estate acquired by foreclosure                                                                                                                                                        |  |              | 1,171     |   |                  |   | 460       |  
|Goodwill                                                                                                                                                                                   |  |              | 85,026    |   |                  |   | 85,026    |  
|Core deposit intangibles, net                                                                                                                                                              |  |              | 3,162     |   |                  |   | 3,551     |  
|Accrued interest receivable                                                                                                                                                                |  |              | 15,002    |   |                  |   | 15,358    |  
|Other assets                                                                                                                                                                               |  |              | 117,491   |   |                  |   | 118,159   |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|TOTAL ASSETS                                                                                                                                                                               |  | $            | 3,789,920 |   |                  | $ | 3,726,859 |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                       |  |              |           |   |                  |   |           |  
|LIABILITIES:                                                                                                                                                                               |  |              |           |   |                  |   |           |  
|Deposits:                                                                                                                                                                                  |  |              |           |   |                  |   |           |  
|Noninterest-bearing demand                                                                                                                                                                 |  | $            | 1,033,743 |   |                  | $ | 1,045,937 |  
|Interest-bearing demand                                                                                                                                                                    |  |              | 1,032,465 |   |                  |   | 1,017,832 |  
|Certificates and other time deposits                                                                                                                                                       |  |              | 918,167   |   |                  |   | 774,374   |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total deposits                                                                                                                                                                             |  |              | 2,984,375 |   |                  |   | 2,838,143 |  
|Short-term borrowings                                                                                                                                                                      |  |              | 330,700   |   |                  |   | 392,850   |  
|Subordinated debt                                                                                                                                                                          |  |              | 44,358    |   |                  |   | 46,238    |  
|Junior subordinated debt                                                                                                                                                                   |  |              | 52,836    |   |                  |   | 82,475    |  
|Accrued interest payable and other liabilities                                                                                                                                             |  |              | 33,637    |   |                  |   | 32,681    |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                                          |  |              | 3,445,906 |   |                  |   | 3,392,387 |  
|                                                                                                                                                                                           |  |             
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                              |  |              |          |   |                  |   |          |  
|                                                                                                                                                                                           |  |             
|SHAREHOLDERS EQUITY:                                                                                                                                                                      |  |              |           |   |                  |   |           |  
|Preferred stock, $1 par value, 1,000,000 shares authorized, no shares issued and outstanding at June 30, 2006 and December 31, 2005,
respectively                                          |  |              |          |   |                  |   |          |  
|Common stock, $1 par value, 100,000,000 shares authorized, 45,785,694 and 45,458,500 issued and 45,410,694 and 45,333,500 outstanding at
June 30, 2006 and December 31, 2005, respectively |  |              | 45,786    |   |                  |   | 45,458    |  
|Capital surplus                                                                                                                                                                            |  |              | 63,567    |   |                  |   | 58,757    |  
|Retained earnings                                                                                                                                                                          |  |              | 254,125   |   |                  |   | 239,171   |  
|Treasury stock                                                                                                                                                                             |  |              | (6,111    | ) |                  |   | (1,984    | )
|Accumulated other comprehensive loss, net of tax                                                                                                                                           |  |              | (13,353   | ) |                  |   | (6,930    | )
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                                                                 |  |              | 344,014   |   |                  |   | 334,472   |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                 |  | $            | 3,789,920 |   |                  | $ | 3,726,859 |  
|                                                                                                                                                                                           |  |              |           |   |                  |   |           |  

See Notes to Consolidated Financial Statements.



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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 Ended June 30, |        |   | Six Months Ended June 30,
|                                                      |  | 2006                        |        |   | 2005                      |   |        | 2006 |  |   | 2005   
|Interest income:                                      |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Loans, including fees                                 |  | $                           | 55,265 |   |                           | $ | 41,933 |      |  | $ | 106,041 |   |  | $ | 79,924
|Securities:                                           |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Taxable                                               |  |                             | 6,011  |   |                           |   | 6,345  |      |  |   | 12,160  |   |  |   | 12,500
|Non-taxable                                           |  |                             | 564    |   |                           |   | 612    |      |  |   | 1,151   |   |  |   | 1,240 
|Trading assets                                        |  |                             | 270    |   |                           |   | 322    |      |  |   | 570     |   |  |   | 634   
|Federal funds sold                                    |  |                             | 43     |   |                           |   | 122    |      |  |   | 85      |   |  |   | 159   
|Deposits in financial institutions                    |  |                             | 32     |   |                           |   | 6      |      |  |   | 90      |   |  |   | 15    
|                                                      |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Total interest income                                 |  |                             | 62,185 |   |                           |   | 49,340 |      |  |   | 120,097 |   |  |   | 94,472
|                                                      |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Interest expense:                                     |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Demand and savings deposits                           |  |                             | 3,883  |   |                           |   | 1,853  |      |  |   | 6,960   |   |  |   | 3,627 
|Certificates and other time deposits                  |  |                             | 8,542  |   |                           |   | 4,669  |      |  |   | 15,676  |   |  |   | 8,041 
|Short-term borrowings                                 |  |                             | 4,413  |   |                           |   | 3,669  |      |  |   | 8,575   |   |  |   | 6,359 
|Subordinated debt                                     |  |                             | 1,125  |   |                           |   | 882    |      |  |   | 2,180   |   |  |   | 1,695 
|Junior subordinated debt                              |  |                             | 1,409  |   |                           |   | 1,722  |      |  |   | 3,201   |   |  |   | 3,412 
|                                                      |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Total interest expense                                |  |                             | 19,372 |   |                           |   | 12,795 |      |  |   | 36,592  |   |  |   | 23,134
|                                                      |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Net interest income                                   |  |                             | 42,813 |   |                           |   | 36,545 |      |  |   | 83,505  |   |  |   | 71,338
|Provision for credit losses                           |  |                             | 1,837  |   |                           |   | 3,221  |      |  |   | 3,163   |   |  |   | 6,561 
|                                                      |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Net interest income after provision for credit losses |  |                             | 40,976 |   |                           |   | 33,324 |      |  |   | 80,342  |   |  |   | 64,777
|                                                      |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Noninterest income:                                   |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Customer service fees                                 |  |                             | 3,061  |   |                           |   | 2,888  |      |  |   | 5,638   |   |  |   | 5,880 
|Net gain (loss) on trading assets                     |  |                             | (167   | ) |                           |   | (11    | )    |  |   | (302    | ) |  |   | 98    
|Net gain (loss) on the sale of securities             |  |                             |       |   |                           |   | (31    | )    |  |   |        |   |  |   | 54    
|Net gain on the sale of loans                         |  |                             | 205    |   |                           |   | 417    |      |  |   | 510     |   |  |   | 674   
|Other                                                 |  |                             | 5,920  |   |                           |   | 3,266  |      |  |   | 9,663   |   |  |   | 6,600 
|                                                      |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Total noninterest income                              |  |                             | 9,019  |   |                           |   | 6,529  |      |  |   | 15,509  |   |  |   | 13,306
|                                                      |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Noninterest expense:                                  |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Salaries and employee benefits                        |  |                             | 18,822 |   |                           |   | 15,278 |      |  |   | 37,497  |   |  |   | 30,672
|Occupancy expense                                     |  |                             | 4,061  |   |                           |   | 3,909  |      |  |   | 7,904   |   |  |   | 7,551 
|Technology                                            |  |                             | 1,615  |   |                           |   | 1,381  |      |  |   | 3,089   |   |  |   | 2,595 
|Professional fees                                     |  |                             | 1,473  |   |                           |   | 1,630  |      |  |   | 2,898   |   |  |   | 2,926 
|Postage, delivery and supplies                        |  |                             | 903    |   |                           |   | 778    |      |  |   | 1,693   |   |  |   | 1,528 
|Marketing                                             |  |                             | 709    |   |                           |   | 617    |      |  |   | 1,093   |   |  |   | 1,262 
|Core deposit intangibles amortization                 |  |                             | 194    |   |                           |   | 102    |      |  |   | 389     |   |  |   | 214   
|Other                                                 |  |                             | 5,416  |   |                           |   | 3,779  |      |  |   | 9,588   |   |  |   | 7,642 
|                                                      |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Total noninterest expense                             |  |                             | 33,193 |   |                           |   | 27,474 |      |  |   | 64,151  |   |  |   | 54,390
|                                                      |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Income before income taxes                            |  |                             | 16,802 |   |                           |   | 12,379 |      |  |   | 31,700  |   |  |   | 23,693
|Provision for income taxes                            |  |                             | 5,533  |   |                           |   | 3,863  |      |  |   | 10,399  |   |  |   | 7,419 
|                                                      |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Net Income                                            |  | $                           | 11,269 |   |                           | $ | 8,516  |      |  | $ | 21,301  |   |  | $ | 16,274
|                                                      |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Earnings per share:                                   |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Basic                                                 |  | $                           | 0.25   |   |                           | $ | 0.19   |      |  | $ | 0.47    |   |  | $ | 0.36  
|                                                      |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       
|Diluted                                               |  | $                           | 0.25   |   |                           | $ | 0.19   |      |  | $ | 0.46    |   |  | $ | 0.36  
|                                                      |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |       

See Notes to Consolidated Financial Statements.



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STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(UNAUDITED)

(In
thousands)



|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   |         |       |  |     |  |   |        |   |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------- |  | --------------- |  | ------------ | - | -------------- | ------ | ---------------- | - | ------ | -------------- | ------ | ------ | --------------------------------- | - | ------- | ----- |  | --- |  | - | ------ | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                     |  | Preferred Stock |  | Common Stock |   | CapitalSurplus |        | RetainedEarnings |   |        | Treasury Stock |        |        | AccumulatedOtherComprehensiveLoss |   |         | Total | 
|                                                                                                     |  | Shares          |  | Amount       |   | Shares         |        | Amount           |   |        |                | Shares |        | Amount                            |   |         |      
|BALANCE AT JANUARY 1, 2005                                                                           |  |                |  | $            |  |                | 45,068 |                  | $ | 45,068 |                | $      | 54,522 |                                   | $ | 213,814 |       |  |    |  | $ |       |   |  | $ | (232    | ) |  | $ | 313,172 |  
|Comprehensive income:                                                                                |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   |         |       |  |     |  |   |        |   |  |   |         |   |  |   |         |  
|Net income                                                                                           |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   | 16,274  |       |  |     |  |   |        |   |  |   |         |   |  |   | 16,274  |  
|Net 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                                                                           |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   |         |       |  |     |  |   |        |   |  |   |         |   |  |   | 14,941  |  
|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   |         |       |  |     |  |   |        |   |  |   |         |   |  |   |         |  
|Issuance of common stock                                                                             |  |                 |  |              |   |                | 215    |                  |   | 215    |                |        | 2,451  |                                   |   |         |       |  |     |  |   |        |   |  |   |         |   |  |   | 2,666   |  
|Cash dividends paid                                                                                  |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   | (5,421  | )     |  |     |  |   |        |   |  |   |         |   |  |   | (5,421  | )
|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   |         |       |  |     |  |   |        |   |  |   |         |   |  |   |         |  
|BALANCE AT JUNE 30, 2005                                                                             |  |                |  | $            |  |                | 45,283 |                  | $ | 45,283 |                | $      | 56,973 |                                   | $ | 224,667 |       |  |    |  | $ |       |   |  | $ | (1,565  | ) |  | $ | 325,358 |  
|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   |         |       |  |     |  |   |        |   |  |   |         |   |  |   |         |  
|BALANCE AT JANUARY 1, 2006                                                                           |  |                |  | $            |  |                | 45,458 |                  | $ | 45,458 |                | $      | 58,757 |                                   | $ | 239,171 |       |  | 125 |  | $ | (1,984 | ) |  | $ | (6,930  | ) |  | $ | 334,472 |  
|Comprehensive income:                                                                                |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   |         |       |  |     |  |   |        |   |  |   |         |   |  |   |         |  
|Net income                                                                                           |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   | 21,301  |       |  |     |  |   |        |   |  |   |         |   |  |   | 21,301  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of ($3,458) |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   |         |       |  |     |  |   |        |   |  |   | (6,423  | ) |  |   | (6,423  | )
|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   |         |       |  |     |  |   |        |   |  |   |         |   |  |   |         |  
|Total comprehensive income                                                                           |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   |         |       |  |     |  |   |        |   |  |   |         |   |  |   | 14,878  |  
|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   |         |       |  |     |  |   |        |   |  |   |         |   |  |   |         |  
|Issuance of common stock                                                                             |  |                 |  |              |   |                | 328    |                  |   | 328    |                |        | 4,810  |                                   |   |         |       |  |     |  |   |        |   |  |   |         |   |  |   | 5,138   |  
|Repurchase of common stock                                                                           |  |                 |  |              |   |                |       |                  |   |       |                |        |        |                                   |   |         |       |  | 250 |  |   | (4,127 | ) |  |   |         |   |  |   | (4,127  | )
|Cash dividends paid                                                                                  |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   | (6,347  | )     |  |     |  |   |        |   |  |   |         |   |  |   | (6,347  | )
|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   |         |       |  |     |  |   |        |   |  |   |         |   |  |   |         |  
|BALANCE AT JUNE 30, 2006                                                                             |  |                |  | $            |  |                | 45,786 |                  | $ | 45,786 |                | $      | 63,567 |                                   | $ | 254,125 |       |  | 375 |  | $ | (6,111 | ) |  | $ | (13,353 | ) |  | $ | 344,014 |  
|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |        |        |                                   |   |         |       |  |     |  |   |        |   |  |   |         |   |  |   |         |  

See Notes to Consolidated Financial Statements.



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STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



|                                                                                  |  |                           |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Six Months Ended June 30, |         
|                                                                                  |  | 2006                      |          |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                           |          |   |      |   |          |  
|Net income                                                                        |  | $                         | 21,301   |   |      | $ | 16,274   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |          |   |      |   |          |  
|Amortization and accretion of premiums and discounts on securities, net           |  |                           | 1,231    |   |      |   | 1,555    |  
|Net gain on the sale of securities                                                |  |                           |         |   |      |   | (54      | )
|Net gain on the sale of premises and equipment                                    |  |                           | (1,122   | ) |      |   | (36      | )
|Net loss (gain) on trading assets                                                 |  |                           | 302      |   |      |   | (98      | )
|Net gain on sale of loans                                                         |  |                           | (510     | ) |      |   | (674     | )
|Provision for credit losses                                                       |  |                           | 3,163    |   |      |   | 6,561    |  
|Writedowns, less gains on sale, of real estate acquired by foreclosure            |  |                           | (278     | ) |      |   | (29      | )
|Depreciation and amortization                                                     |  |                           | 4,161    |   |      |   | 3,881    |  
|Proceeds from sales of trading assets                                             |  |                           | 29,152   |   |      |   | 92,562   |  
|Purchases of trading assets                                                       |  |                           | (1,375   | ) |      |   | (95,667  | )
|Proceeds from principal paydowns of trading securities                            |  |                           | 203      |   |      |   | 20,801   |  
|Stock-based compensation expense (net of tax benefit recognized)                  |  |                           | 882      |   |      |   |         |  
|Excess tax benefits from share-based payment arrangements                         |  |                           | (470     | ) |      |   |         |  
|Net increase in loans held for sale                                               |  |                           | (3,296   | ) |      |   | (1,640   | )
|Net decrease (increase) in accrued interest receivable and other assets           |  |                           | 2,917    |   |      |   | (3,324   | )
|Net increase (decrease) in accrued interest payable and other liabilities         |  |                           | 237      |   |      |   | (1,935   | )
|                                                                                  |  |                           |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                           | 56,498   |   |      |   | 38,177   |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                           |          |   |      |   |          |  
|Proceeds from the maturities or calls and paydowns of held-to-maturity securities |  |                           | 8,494    |   |      |   | 11,577   |  
|Proceeds from the sale of available-for-sale securities                           |  |                           |         |   |      |   | 44,257   |  
|Proceeds from maturities or calls and paydowns of available-for-sale securities   |  |                           | 53,996   |   |      |   | 69,018   |  
|Purchases of available-for-sale securities                                        |  |                           | (23,976  | ) |      |   | (146,022 | )
|Purchases of held-to-maturity securities                                          |  |                           | (5,671   | ) |      |   | (14,916  | )
|Net increase in loans held for investment                                         |  |                           | (183,366 | ) |      |   | (241,083 | )
|Proceeds from sale of real estate acquired by foreclosure                         |  |                           | 2,386    |   |      |   | 984      |  
|Proceeds from sale of land held for sale                                          |  |                           | 1,570    |   |      |   |         |  
|Net increase in interest-bearing deposits in financial institutions               |  |                           |         |   |      |   | 396      |  
|Proceeds from sale of premises and equipment                                      |  |                           | 3,926    |   |      |   | 248      |  
|Purchase of premises and equipment                                                |  |                           | (2,339   | ) |      |   | (2,004   | )
|                                                                                  |  |                           |          |   |      |   |          |  
|Net cash used in investing activities                                             |  |                           | (144,980 | ) |      |   | (277,545 | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                           |          |   |      |   |          |  
|Net increase in deposits                                                          |  |                           | 146,232  |   |      |   | 161,213  |  
|Net (decrease) increase in short-term borrowings                                  |  |                           | (62,150  | ) |      |   | 83,150   |  
|Redemption of junior subordinated debt                                            |  |                           | (29,639  | ) |      |   |         |  
|Proceeds from issuance of common stock                                            |  |                           | 3,420    |   |      |   | 2,666    |  
|Repurchase of common stock                                                        |  |                           | (4,127   | ) |      |   |         |  
|Excess tax benefits from share-based payment arrangements                         |  |                           | 470      |   |      |   |         |  
|Dividends paid                                                                    |  |                           | (6,347   | ) |      |   | (5,421   | )
|                                                                                  |  |                           |          |   |      |   |          |  
|Net cash provided by financing activities                                         |  |                           | 47,859   |   |      |   | 241,608  |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                              |  |                           | (40,623  | ) |      |   | 2,240    |  
|CASH AND CASH EQUIVALENTS:                                                        |  |                           |          |   |      |   |          |  
|Beginning of period                                                               |  |                           | 147,154  |   |      |   | 88,439   |  
|                                                                                  |  |                           |          |   |      |   |          |  
|End of period                                                                     |  | $                         | 106,531  |   |      | $ | 90,679   |  
|                                                                                  |  |                           |          |   |      |   |          |  
|Supplemental information:                                                         |  |                           |          |   |      |   |          |  
|Income taxes paid                                                                 |  | $                         | 11,784   |   |      | $ | 7,600    |  
|Interest paid                                                                     |  |                           | 34,737   |   |      |   | 21,595   |  
|Noncash investing and financing activities                                       |  |                           |          |   |      |   |          |  
|Acquisitions of real estate through foreclosure of collateral                     |  |                           | 2,819    |   |      |   | 891      |  
|Transfer of loans from held for investment to loans held for sale                 |  |                           | 12,100   |   |      |   |         |  

See Notes to Consolidated Financial Statements



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STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.    ACCOUNTING
POLICIES

Basis of Presentation

The
consolidated Financial Statements are unaudited and include the accounts of Sterling Bancshares and its subsidiaries (the Company) except for those subsidiaries where it has been determined that the Company is not the primary
beneficiary. The Companys accounting and financial reporting policies are in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to
Form 10-Q. The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature
unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. The interim financial information should be read with the
Companys 2005 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to current period classifications. These reclassifications had no affect on net income or shareholders equity.

Recent Accounting Standards

Statement of Accounting
StandardsNo. 123R, Share-Based Payment (Revised 2004) (SFAS 123R) established standards for accounting for transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the
enterprise or (b) liabilities that are based on the fair value of the enterprises equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R applies to new awards and to awards modified,
repurchased, or cancelled after January 1, 2006. The Company used the modified prospective application in implementing SFAS 123R. Beginning in 2006, the Companys results of operations reflect compensation expense for all employee
stock-based compensation, including the unvested portion of stock options granted prior to 2006. Prior to 2006, the Company accounted for stock-based employee compensation using the intrinsic value-based method of accounting, as permitted. Under the
intrinsic value-based method of accounting, no compensation expense was recognized for the Companys incentive stock options or for the Companys employee stock purchase plan. The adoption of this accounting standard resulted in additional
stock-based compensation expense of $97 thousand and $204 thousand for the three and six-month periods ended June 30, 2006, respectively, attributable to stock options and the Companys employee stock purchase plan. There was no income tax
benefit recorded for this additional stock-based compensation expense. The adoption of this accounting standard did not have a meaningful impact on earnings per share for the same time periods.



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The pro-forma net income and earnings per share information for the three and six-month periods ended June 30, 2005
presented below was determined as if we had accounted for our employee stock-based compensation under the fair value method (dollars in thousands except for per share amounts).



|                                                                                                                         |  |                                |       |   |                              |   |        |  
|------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------ | ----- | - | ---------------------------- | - | ------ | -
|                                                                                                                         |  | Three monthsended June 30,2005 |       |   | Six monthsended June 30,2005 |  
|Net income, as reported                                                                                                  |  | $                              | 8,516 |   |                              | $ | 16,274 |  
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effect                |  |                                | 241   |   |                              |   | 241    |  
|Less: Total stock-based employee compensation expense determined under the fair-value based method, net of related taxes |  |                                | (374  | ) |                              |   | (514   | )
|                                                                                                                         |  |                                |       |   |                              |   |        |  
|Pro-forma net income                                                                                                     |  | $                              | 8,383 |   |                              | $ | 16,001 |  
|                                                                                                                         |  |                                |       |   |                              |   |        |  
|Earnings per share:                                                                                                      |  |                                |       |   |                              |   |        |  
|Basicas reported                                                                                                        |  | $                              | 0.19  |   |                              | $ | 0.36   |  
|                                                                                                                         |  |                                |       |   |                              |   |        |  
|Basicpro-forma                                                                                                          |  | $                              | 0.19  |   |                              | $ | 0.35   |  
|                                                                                                                         |  |                                |       |   |                              |   |        |  
|Dilutedas reported                                                                                                      |  | $                              | 0.19  |   |                              | $ | 0.36   |  
|                                                                                                                         |  |                                |       |   |                              |   |        |  
|Dilutedpro-forma                                                                                                        |  | $                              | 0.18  |   |                              | $ | 0.35   |  
|                                                                                                                         |  |                                |       |   |                              |   |        |  

In February 2006, the Financial Accounting Standard Board (FASB) issued Statement of Accounting
Standards No. 155 (SFAS 155) Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140. It establishes, among other things, the accounting for certain derivatives embedded in
other financial instruments. The primary objective of this Statement with respect to FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, is to simplify accounting for any hybrid financial instrument that
contains an embedded derivative that would otherwise require bifurcation. The primary objective of this Statement with respect to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, is to eliminate a restriction on the passive derivative instruments that a qualifying special-purpose entity (QSPE) may hold. This statement is effective for all financial instruments acquired or issued after the beginning of an
entitys first fiscal year that begins after September 15, 2006. The adoption of this accounting standard is not expected to have a material impact on the Companys financial statements.

In March 2006, the FASB issued Statement of Accounting Standards No. 156 (SFAS 156) Accounting for Servicing of Financial Assets, an amendment of
FASB Statement No. 140. It establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities. This Statement amends Statement 140 to require that all separately recognized servicing assets
and servicing liabilities be initially measured at fair value, if practicable. This statement is effective for fiscal years beginning after September 15, 2006. The adoption of this accounting standard is not expected to have a material impact
on the Companys financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48) Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109
(FAS 109), Accounting for Income Taxes. FIN 48 clarifies the application of FAS 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an
enterprises financial statements. Additionally, FIN 48 provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The adoption of this accounting standard is not expected to have a material impact on the Companys financial statements.



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2.    SECURITIES

The amortized cost and fair value of securities are as follows (in thousands):



|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|------------------------------------------------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                                    |  | June 30, 2006    
|                                                                    |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                  |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                 | 9,011   |                      | $ |                      |  | $ | (154       | ) |  | $ | 8,857  
|Obligations of states of the U.S. and political subdivisions        |  |                   | 2,433   |                      |   | 11                    |  |   | (4         | ) |  |   | 2,440  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 447,843 |                      |   | 119                   |  |   | (18,727    | ) |  |   | 429,235
|Other securities                                                    |  |                   | 16,378  |                      |   |                      |  |   | (1,788     | ) |  |   | 14,590 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 475,665 |                      | $ | 130                   |  | $ | (20,673    | ) |  | $ | 455,122
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                 | 55,410  |                      | $ | 373                   |  | $ | (855       | ) |  | $ | 54,928 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 64,743  |                      |   |                      |  |   | (2,173     | ) |  |   | 62,570 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 120,153 |                      | $ | 373                   |  | $ | (3,028     | ) |  | $ | 117,498
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|                                                                    | 
|                                                                    |  | December 31, 2005
|                                                                    |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                  |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                 | 10,031  |                      | $ |                      |  | $ | (107       | ) |  | $ | 9,924  
|Obligations of states of the U.S. and political subdivisions        |  |                   | 3,303   |                      |   | 27                    |  |   | (4         | ) |  |   | 3,326  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 476,541 |                      |   | 286                   |  |   | (10,099    | ) |  |   | 466,728
|Other securities                                                    |  |                   | 16,732  |                      |   |                      |  |   | (765       | ) |  |   | 15,967 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 506,607 |                      | $ | 313                   |  | $ | (10,975    | ) |  | $ | 495,945
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                 | 58,288  |                      | $ | 649                   |  | $ | (562       | ) |  | $ | 58,375 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 64,765  |                      |   | 9                     |  |   | (1,134     | ) |  |   | 63,640 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 123,053 |                      | $ | 658                   |  | $ | (1,696     | ) |  | $ | 122,015
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        



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The contractual maturities of securities at June 30, 2006 are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Dollar amounts are shown in thousands.



|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|------------------------------------------------------------------ |  | ------------------ | ------- | ---------------- | - | ------------- |  | ---------- | ------- |  | - | -------
|                                                                   |  | Available-for-Sale |         | Held-to-Maturity
|                                                                   |  | AmortizedCost      |         | Fair Value       |   | AmortizedCost |  | Fair Value
|Due in one year or less                                            |  | $                  | 3,797   |                  | $ | 3,779         |  | $          | 5,655   |  | $ | 5,679  
|Due after one year through five years                              |  |                    | 6,980   |                  |   | 6,850         |  |            | 27,680  |  |   | 27,678 
|Due after five years through ten years                             |  |                    | 667     |                  |   | 668           |  |            | 22,075  |  |   | 21,571 
|Due after ten years                                                |  |                    |        |                  |   |              |  |            |        |  |   |       
|Mortgage-backed securities and collateralized mortgage obligations |  |                    | 447,843 |                  |   | 429,235       |  |            | 64,743  |  |   | 62,570 
|Other securities                                                   |  |                    | 16,378  |                  |   | 14,590        |  |            |        |  |   |       
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|Total                                                              |  | $                  | 475,665 |                  | $ | 455,122       |  | $          | 120,153 |  | $ | 117,498
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        

The following table summarizes the proceeds received and gross realized gains and losses on the sales of the
available-for-sale securities (dollars in thousands):



|                              |  |                            |   |      |                          |       |      |  |      |   |  |   |        |  
|----------------------------- |  | -------------------------- | - | ---- | ------------------------ | ----- | ---- |  | ---- | - |  | - | ------ | -
|                              |  | Three months endedJune 30, |   |      | Six months endedJune 30, |      
|                              |  | 2006                       |   | 2005 |                          |       | 2006 |  | 2005 |  
|Proceeds from sales and calls |  | $                          |  |      | $                        | 8,814 |      |  | $    |  |  | $ | 44,257 |  
|Gross realized gains          |  |                            |  |      |                          | 5     |      |  |      |  |  |   | 143    |  
|Gross realized losses         |  |                            |  |      |                          | (36   | )    |  |      |  |  |   | (89    | )

Securities with unrealized losses segregated by length of impairment, were as follows (dollars in thousands):



|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |         |            |   |         |   |  |   |        
|------------------------------------------------------------------- |  | ------------------- | ------- | --------------------- | - | ------ | ---------- |  | ------------- | ------- | --------------------- | - | ------- | ---------- | - | ------- | - |  | - | -------
|                                                                    |  | June 30, 2006      
|                                                                    |  | Less than 12 Months |         | More than 12 Months  
|                                                                    |  | AmortizedCost       |         | GrossUnrealizedLosses |   |        | Fair Value |  | AmortizedCost |         | GrossUnrealizedLosses |   |         | Fair Value
|Available-for-Sale                                                  |  |                     |         |                       |   |        |            |  |               |         |                       |   |         |            |   |         |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                   | 1,504   |                       | $ | (3     | )          |  | $             | 1,501   |                       | $ | 7,507   |            | $ | (151    | ) |  | $ | 7,356  
|Obligations of states of the U.S. and political subdivisions        |  |                     | 848     |                       |   | (4     | )          |  |               | 844     |                       |   | 20      |            |   |        |   |  |   | 20     
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 103,433 |                       |   | (2,705 | )          |  |               | 100,728 |                       |   | 339,863 |            |   | (16,022 | ) |  |   | 323,841
|Other securities                                                    |  |                     | 7,764   |                       |   | (1,192 | )          |  |               | 6,572   |                       |   | 8,439   |            |   | (596    | ) |  |   | 7,843  
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |         |            |   |         |   |  |   |        
|Total                                                               |  | $                   | 113,549 |                       | $ | (3,904 | )          |  | $             | 109,645 |                       | $ | 355,829 |            | $ | (16,769 | ) |  | $ | 339,060
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |         |            |   |         |   |  |   |        
|Held-to-Maturity                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |         |            |   |         |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                   | 11,917  |                       | $ | (164   | )          |  | $             | 11,753  |                       | $ | 18,939  |            | $ | (691    | ) |  | $ | 18,248 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 23,852  |                       |   | (763   | )          |  |               | 23,089  |                       |   | 40,891  |            |   | (1,410  | ) |  | $ | 39,481 
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |         |            |   |         |   |  |   |        
|Total                                                               |  | $                   | 35,769  |                       | $ | (927   | )          |  | $             | 34,842  |                       | $ | 59,830  |            | $ | (2,101  | ) |  | $ | 57,729 
|                                                                    |  |                     |         |                       |   |        |            |  |               |         |                       |   |         |            |   |         |   |  |   |        

Declines in the fair value of individual securities below their cost that are other-than-temporary would result in
writedowns, as a realized loss, of the individual securities to their fair value. In evaluating other-than-temporary



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impairment losses, management considers several factors including the severity and the duration that the fair value has been less than cost, the credit
quality of the issuer, and the intent and ability of the Company to hold the security until recovery of the fair value. The average loss on securities in an unrealized loss position was 4.2% of the amortized cost basis at June 30, 2006. Other
securities in an unrealized loss position of less than 12 months were in a loss position of approximately 15% of the Companys amortized cost basis. These investments have declined in value over the last nine months due to increases in interest
rates. There are no remaining securities in the Companys securities portfolio in a loss position greater than 10% of the Companys amortized cost basis at June 30, 2006. Management believes that the unrealized losses on the
Companys securities portfolio were caused primarily by interest rate increases. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to
hold those investments until a recovery of fair value, which may be at maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2006.

The Company does not own any securities of any one issuer (other than U.S. government and its agencies) for which the aggregate adjusted cost exceeds 10% of the
consolidated shareholders equity at June 30, 2006.

Securities with carrying values totaling $375.0 million and fair values totaling $361.6
million were pledged to secure public deposits at June 30, 2006.

3.    LOANS

The loan portfolio classified by major type was as follows (dollars in thousands):



|                                |  |               |           |   |                   |   |        |   |           |  |       |  
|------------------------------- |  | ------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                |  | June 30, 2006 |           |   | December 31, 2005 |  
|                                |  | Amount        |           | % |                   |   | Amount |   | %         | 
|Loans held for sale             |  | $             | 24,215    |   | 0.8               | % |        | $ | 8,354     |  | 0.3   | %
|Loans held for investment       |  |               |           |   |                   |   |        |   |           |  |       |  
|Domestic                        |  |               |           |   |                   |   |        |   |           |  |       |  
|Commercial and industrial       |  |               | 784,856   |   | 27.2              | % |        |   | 738,061   |  | 27.3  | %
|Real estate:                    |  |               |           |   |                   |   |        |   |           |  |       |  
|Commercial                      |  |               | 1,281,615 |   | 44.5              | % |        |   | 1,221,610 |  | 45.3  | %
|Construction                    |  |               | 520,024   |   | 18.1              | % |        |   | 438,454   |  | 16.2  | %
|Residential mortgage            |  |               | 171,581   |   | 6.0               | % |        |   | 190,701   |  | 7.1   | %
|Consumer/other                  |  |               | 71,867    |   | 2.5               | % |        |   | 72,937    |  | 2.7   | %
|Foreign                         |  |               |           |   |                   |   |        |   |           |  |       |  
|Commercial and industrial       |  |               | 23,895    |   | 0.8               | % |        |   | 26,080    |  | 1.0   | %
|Other loans                     |  |               | 2,823     |   | 0.1               | % |        |   | 3,165     |  | 0.1   | %
|                                |  |               |           |   |                   |   |        |   |           |  |       |  
|Total loans held for investment |  |               | 2,856,661 |   | 99.2              | % |        |   | 2,691,008 |  | 99.7  | %
|                                |  |               |           |   |                   |   |        |   |           |  |       |  
|Total loans                     |  | $             | 2,880,876 |   | 100.0             | % |        | $ | 2,699,362 |  | 100.0 | %
|                                |  |               |           |   |                   |   |        |   |           |  |       |  

Loan maturities and rate sensitivity of the loans held for investment excluding residential mortgage and consumer
loans, at June 30, 2006 are as follows (in thousands):



|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|----------------------------------- |  | ---------------------- | --------- | ---------------------------------- | - | ------------------- |  | ----- | ------- |  | - | ---------
|                                    |  | Due in OneYear or Less |           | Due AfterOne YearThroughFive Years |   | Due AfterFive Years |  | Total
|Commercial and industrial           |  | $                      | 607,769   |                                    | $ | 158,030             |  | $     | 19,057  |  | $ | 784,856  
|Real estatecommercial              |  |                        | 669,328   |                                    |   | 462,004             |  |       | 150,283 |  |   | 1,281,615
|Real estateconstruction            |  |                        | 402,977   |                                    |   | 84,690              |  |       | 32,357  |  |   | 520,024  
|Foreign loans                       |  |                        | 25,285    |                                    |   | 1,433               |  |       |        |  |   | 26,718   
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|Total                               |  | $                      | 1,705,359 |                                    | $ | 706,157             |  | $     | 201,697 |  | $ | 2,613,213
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|Loans with a fixed interest rate    |  | $                      | 182,170   |                                    | $ | 600,455             |  | $     | 172,915 |  | $ | 955,540  
|Loans with a floating interest rate |  |                        | 1,523,189 |                                    |   | 105,702             |  |       | 28,782  |  |   | 1,657,673
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|Total                               |  | $                      | 1,705,359 |                                    | $ | 706,157             |  | $     | 201,697 |  | $ | 2,613,213
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          



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The loan portfolio consists of various types of loans made principally to borrowers located in the Houston, Dallas and
San Antonio metropolitan areas. As of June 30, 2006, there was no concentration of loans to any one type of industry exceeding 10% of total loans nor were there any loans classified as highly leveraged transactions.

As of June 30, 2006 and December 31, 2005, loans from Sterling Bank outstanding to directors, officers and their affiliates were $6.9 million and $9.0 million,
respectively. In the opinion of management, all transactions entered into between Sterling Bank and such related parties have been and are in the ordinary course of business, made on the same terms and conditions as similar transactions with
unaffiliated persons. For the six months ended June 30, 2006, there were no principal additions while principal payments were $114.0 thousand. Insider loans were reduced by $2.0 million as two directors with insider loans were no longer serving
on the board as of June 30, 2006 as compared to December 31, 2005.

The recorded investment in impaired loans was $12.4 million and $22.4 million
at June 30, 2006 and December 31, 2005, respectively. Such impaired loans required an allowance for loan losses of $3.2 million and $4.2 million, respectively. The average recorded investment in impaired loans for the three and six months
ended June 30, 2006 was $15.6 million and $19.2 million, respectively, and for the three and six months ended June 30, 2005 was $19.1 million and $21.1 million, respectively. Interest income on impaired loans of $39 thousand and $64
thousand was recognized for the three and six months ended June 30, 2005, respectively. No interest on impaired loans was received for the three and six months ended June 30, 2006.

Included in impaired loans are nonperforming loans of $12.4 million and $21.8 million at June 30, 2006 and December 31, 2005, respectively, which have been
categorized by management as nonaccrual loans. Interest foregone on nonaccrual loans for the six months ended June 30, 2006 and 2005 was approximately $899 thousand and $880 thousand, respectively. The Company did not have any restructured
loans as of June 30, 2006 or December 31, 2005.

When management doubts a borrowers ability to meet payment obligations, which typically
occurs when principal or interest payments are more than 90 days past due, the loans are placed on nonaccrual status. Loans 90 days or more past due, not on nonaccrual were $543 thousand and $162 thousand at June 30, 2006 and December 31,
2005, respectively.

4.    ALLOWANCE FOR CREDIT LOSSES

An analysis of activity in the allowance for credit losses was as follows (in thousands):



|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                       |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                       |  | 2006                       |        |   | 2005                     |   |        | 2006 |  |   | 2005   |  
|Allowance for loan losses at beginning of the period                   |  | $                          | 31,116 |   |                          | $ | 30,760 |      |  | $ | 31,230 |   |  | $ | 29,406 |  
|Loans charged-off                                                      |  |                            | 2,085  |   |                          |   | 3,269  |      |  |   | 4,231  |   |  |   | 5,634  |  
|Loan recoveries                                                        |  |                            | (929   | ) |                          |   | (1,409 | )    |  |   | (1,437 | ) |  |   | (1,796 | )
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net loans charged-off                                                  |  |                            | 1,156  |   |                          |   | 1,860  |      |  |   | 2,794  |   |  |   | 3,838  |  
|Provision for loan losses                                              |  |                            | 1,922  |   |                          |   | 3,309  |      |  |   | 3,446  |   |  |   | 6,641  |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Allowance for loan losses at end of the period                         |  |                            | 31,882 |   |                          |   | 32,209 |      |  |   | 31,882 |   |  |   | 32,209 |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Reserve for losses on unfunded loan commitments at beginning of period |  |                            | 975    |   |                          |   | 834    |      |  |   | 1,173  |   |  |   | 826    |  
|Provision for losses on unfunded loan commitments                      |  |                            | (85    | ) |                          |   | (88    | )    |  |   | (283   | ) |  |   | (80    | )
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Reserve for unfunded loan commitments at end of period                 |  |                            | 890    |   |                          |   | 746    |      |  |   | 890    |   |  |   | 746    |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total allowance for credit losses                                      |  | $                          | 32,772 |   |                          | $ | 32,955 |      |  | $ | 32,772 |   |  | $ | 32,955 |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



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5.     GOODWILL AND OTHER INTANGIBLES

The changes in the carrying amount of goodwill by reporting unit for the year ended December 31, 2005, and the period ended June 30, 2006, were as follows (in
thousands):



|                                   |  |         |        |            |   |        |  |       |        |  |   |       
|---------------------------------- |  | ------- | ------ | ---------- | - | ------ |  | ----- | ------ |  | - | ------
|                                   |  | Houston |        | SanAntonio |   | Dallas |  | Total
|Balance, January 1, 2005           |  | $       | 29,613 |            | $ | 27,205 |  | $     | 5,662  |  | $ | 62,480
|Prestonwood Bancshares acquisition |  |         |       |            |   |        |  |       | 22,546 |  |   | 22,546
|                                   |  |         |        |            |   |        |  |       |        |  |   |       
|Balance, December 31, 2005         |  |         | 29,613 |            |   | 27,205 |  |       | 28,208 |  |   | 85,026
|Goodwill adjustment                |  |         |       |            |   |       |  |       |       |  |   |      
|                                   |  |         |        |            |   |        |  |       |        |  |   |       
|Balance, June 30, 2006             |  | $       | 29,613 |            | $ | 27,205 |  | $     | 28,208 |  | $ | 85,026
|                                   |  |         |        |            |   |        |  |       |        |  |   |       

The changes in the carrying amounts of core deposit intangibles for the year ended December 31, 2005, and the
period ended June 30, 2006, were as follows (in thousands):



|                                   |  |                        |       |  
|---------------------------------- |  | ---------------------- | ----- | -
|                                   |  | CoreDepositIntangibles |      
|Balance, January 1, 2005           |  | $                      | 1,839 |  
|Amortization expense               |  |                        | (521  | )
|Prestonwood Bancshares acquisition |  |                        | 2,233 |  
|                                   |  |                        |       |  
|Balance, December 31, 2005         |  |                        | 3,551 |  
|Amortization expense               |  |                        | (389  | )
|                                   |  |                        |       |  
|Balance, June 30, 2006             |  | $                      | 3,162 |  
|                                   |  |                        |       |  

6.    JUNIOR SUBORDINATED DEBT/COMPANY MANDATORILY
REDEEMABLE TRUST PREFERRED SECURITIES

As of June 30, 2006, the Company had the following issues of trust preferred securities outstanding and
junior subordinated debt owed to trusts (dollars in thousands):



|                    |  |                    |  |                                     |        |               |                        |                                      |   |                     |  |                   
|------------------- |  | ------------------ |  | ----------------------------------- | ------ | ------------- | ---------------------- | ------------------------------------ | - | ------------------- |  | ------------------
|Description         |  | Issuance Date      |  | TrustPreferredSecuritiesOutstanding |        | Interest Rate |                        | JuniorSubordinatedDebt Owed ToTrusts |   | Final Maturity Date
|Statutory Trust One |  | August 30, 2002    |  | $                                   | 20,000 |               | 3-monthLIBOR plus3.45% |                                      | $ | 20,619              |  | August 30, 2032   
|                    |  |                    |  |                                     |       
|Capital Trust III   |  | September 26, 2002 |  |                                     | 31,250 |               | 8.30% Fixed            |                                      |   | 32,217              |  | September 26, 2032
|                    |  |                    |  |                                     |        |               |                        |                                      |   |                     |  |                   
|Total               |  |                    |  | $                                   | 51,250 |               |                        |                                      | $ | 52,836              |  |                   
|                    |  |                    |  |                                     |        |               |                        |                                      |   |                     |  |                   

Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and
investing the proceeds thereof in junior subordinated debentures of Sterling Bancshares, the sole asset of each trust. 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 Sterling Bancshares. Each trusts ability to pay amounts due on the trust
preferred securities is solely dependent upon Sterling Bancshares making payment on the related junior subordinated debentures. Sterling Bancshares obligations under the junior subordinated debentures and other relevant trust agreements, in
aggregate, constitute a full and unconditional guarantee by Sterling Bancshares of each respective trusts obligations under the trust securities issued by each respective trust.



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Each issuance of trust preferred securities outstanding is mandatorily redeemable 30 years after issuance and is callable
beginning five years after issuance if certain conditions are met (including the receipt of appropriate regulatory approvals). The trust preferred securities may be prepaid earlier upon the occurrence and continuation of certain events including a
change in their tax status or regulatory capital treatment. In each case, the redemption price is equal to 100% of the face amount of the trust preferred securities, plus the accrued and unpaid distributions thereon through the redemption date.

The trust preferred securities issued under Statutory Trust One were privately placed. The interest on these securities is a floating rate that resets
quarterly. Until August 30, 2007, there is a ceiling on the three-month LIBOR of 8.50% resulting in a ceiling on the floating rate of 11.95% during this period. As of June 30, 2006, the floating rate on these securities was 8.43% as
compared to 7.47% at December 31, 2005.

During the second quarter of 2006, Sterling Bancshares Capital Trust II (the Trust), a subsidiary
of the Company, redeemed all 1.2 million of its 9.20% Cumulative Trust Preferred Securities (Nasdaq: SBIBO) and all 35,567 of its 9.20% Common Securities at a redemption price equal to the $25.00 liquidation amount of each security, plus all
accrued and unpaid distributions per security to the Redemption Date.

The Trust took such action in connection with the concurrent prepayment by the
Company of all of its $29.6 million 9.20% Junior Subordinated Deferrable Interest Debentures (the Debentures) due March 21, 2031 which were held exclusively by the Trust. The Debentures were prepaid on the Redemption Date at a
prepayment price equal to the principal outstanding amount of the Debentures plus accrued and unpaid interest to the Redemption Date. During the second quarter of 2006, the Company wrote off the remaining unamortized debt issuance costs associated
with these Debentures totaling $1.3 million.

7.    STOCK-BASED COMPENSATION

The 2003 Stock Incentive and Compensation Plan (the 2003 Stock Plan), which has been approved by the shareholders, permits the grant of unrestricted stock
units, restricted stock unit awards, phantom stock awards, stock appreciation rights or stock options for up to 2,150,000 shares of common stock. Certain share awards granted under previous shareholder-approved plans are still outstanding and
unvested at June 30, 2006.

Options are granted to officers and employees at exercise prices determined by the Human Resources Programs Committee
(Committee) of the Board of Directors. These options generally have exercise prices equal to the fair market value of the common stock at the date of grant, vest ratably over a four-year period and must be exercised within ten years from
the date of grant. Restricted stock unit awards generally vest over four years. Certain awards provide for accelerated vesting if there is a change in control (as defined in the 2003 Stock Plan).

Total stock-based compensation expense that was charged against income for the three and six-month periods ended June 30, 2006 was $643 thousand and $1.2 million,
respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $191 thousand and $366 thousand for the three and six months ended June 30, 2006. There was no income tax benefit
recognized in the income statement for the three month period ended June 30, 2005. Income tax benefit of $130 thousand was recognized for the six-month period ended June 30, 2005.

Cash received for exercises under all share-based payment arrangements during the three and six-month periods ended June 30, 2006 was $848 thousand and $3.4
million, respectively, and for the three and six-month periods ended June 30, 2005 was $386 thousand and $1.6 million, respectively. The actual tax benefit realized for the tax deductions under all share-based payment arrangements totaled
$84 thousand and $470 thousand, respectively, for the three and six-month periods ended June 30, 2006 and $81 thousand and $354 thousand, respectively, for the three and six-month periods ended June 30, 2005.

The Company issues new shares upon the exercise of all share-based payment arrangements.



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##### Table of Contents

Stock Options  The fair value of each option award is estimated on the date of grant using a
Black-Scholes-Merton option valuation model that uses the assumptions noted in the following table. The Black-Scholes-Merton formula assumes that option exercises occur at the end of an options contractual term, and that expected
volatility, expected dividends, and risk-free interest rates are constant over the options term. The Black-Scholes-Merton formula is adjusted to take into account certain characteristics of employee share options and similar instruments
that are not consistent with the models assumptions. Because of the nature of the formula, those adjustments take the form of weighted-average assumptions about those characteristics. The expected term represents the period of time that
options granted are expected to be outstanding. The risk-free interest rate of the option is based on the U.S. Treasury zero-coupon with a remaining term equal to the expected term used in the assumption model. The historical volatility is a measure
of fluctuations in the Companys share price.



|                        |  |                          |   |  |       |  
|----------------------- |  | ------------------------ | - |  | ----- | -
|                        |  | Six Months EndedJune 30, |  
|                        |  | 2006                     |   |  | 2005  |  
|Expected term (years)   |  | 4.76                     |   |  | 4.62  |  
|Risk-free interest rate |  | 4.79                     | % |  | 3.89  | %
|Historical volatility   |  | 30.09                    | % |  | 20.97 | %
|Dividend yield          |  | 1.66                     | % |  | 1.62  | %

A summary of changes in outstanding stock options during the six months ended June 30, 2006 were as follows:



|                                         |  |                       |   |  |                              |       |                                         |      |                                       |   |      
|---------------------------------------- |  | --------------------- | - |  | ---------------------------- | ----- | --------------------------------------- | ---- | ------------------------------------- | - | -----
|                                         |  | Shares (In thousands) |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm |      | AggregateIntrinsicValue(In thousands)
|Shares under option, beginning of period |  | 1,314                 |   |  | $                            | 10.95 |                                         |      |                                       |   |      
|Shares granted                           |  | 147                   |   |  |                              | 17.10 |                                         |      |                                       |   |      
|Shares forfeited or expired              |  | (36                   | ) |  |                              | 14.02 |                                         |      |                                       |   |      
|Shares exercised                         |  | (275                  | ) |  |                              | 11.04 |                                         |      |                                       |   |      
|                                         |  |                       |   |  |                              |       |                                         |      |                                       |   |      
|Shares under option, end of period       |  | 1,150                 |   |  | $                            | 11.19 |                                         | 5.16 |                                       | $ | 8,697
|                                         |  |                       |   |  |                              |       |                                         |      |                                       |   |      
|Shares exercisable, end of period        |  | 900                   |   |  | $                            | 10.07 |                                         | 3.93 |                                       | $ | 7,807
|                                         |  |                       |   |  |                              |       |                                         |      |                                       |   |      

The weighted-average grant-date fair value of the options granted during the six-month period ended June 30,
2006 was $4.94, compared to $2.75 for the same time period in 2005. The total intrinsic value of options exercised during the six-month period ended June 30, 2006 was $1.7 million compared to $1.1 million for the comparable time period in
2005.

Share Awards  A summary of the status of the Companys nonvested share awards is presented below (shares in thousands):



|                                            |  |                           |   |      |                                     |       |        |     |   |                                     |   |      
|------------------------------------------- |  | ------------------------- | - | ---- | ----------------------------------- | ----- | ------ | --- | - | ----------------------------------- | - | -----
|                                            |  | Six months ended June 30,
|                                            |  | 2006                      |   | 2005
|                                            |  | Shares                    |   |      | WeightedAverageGrant-DateFair Value |       | Shares |     |   | WeightedAverageGrant-DateFair Value
|Nonvested share awards, beginning of period |  | 106                       |   |      | $                                   | 14.33 |        | 41  |   |                                     | $ | 13.53
|Shares granted                              |  | 83                        |   |      |                                     | 16.95 |        | 40  |   |                                     |   | 13.99
|Shares forfeited                            |  | (9                        | ) |      |                                     | 14.42 |        | (3  | ) |                                     |   | 13.59
|Shares vested                               |  | (33                       | ) |      |                                     | 16.16 |        | (10 | ) |                                     |   | 16.29
|                                            |  |                           |   |      |                                     |       |        |     |   |                                     |   |      
|Nonvested share awards, end of period       |  | 147                       |   |      | $                                   | 15.39 |        | 68  |   |                                     | $ | 13.42
|                                            |  |                           |   |      |                                     |       |        |     |   |                                     |   |      



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As of June 30, 2006, there was $1.7 million of total unrecognized compensation expense related to nonvested
share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 2.51 years. The total fair value of shares vested during the six months ended June 30, 2006 was $537 thousand.

The Company grants certain executives and other key employees restricted stock unit awards whose vesting is contingent upon meeting various office, departmental and
company-wide annual performance goals. The fair value of each grant was estimated using the current public market price of the Companys common stock on June 30, 2006 and assumes that performance goals will be achieved. If such goals
are not met, no future compensation expense will be recognized and any previously recognized compensation expense will be reversed. There were 8,000 performance-based contingent grants outstanding at June 30, 2006. There was no unrecognized
compensation expense for these grants at June 30, 2006.

Effective January 1, 2006, the Company entered into an employment agreement with its
chief executive officer (Executive). This agreement establishes, among other things, certain incentive compensation terms which include equity incentives under the 2003 Stock Plan. The Executive was awarded 125,000 Performance Restricted
Share Units (PRSU). The PRSUs will be earned subject to certain performance measures over a four year period. These performance measures include annual growth in earnings per share, average return on equity and an overall board
evaluation. Based on these criteria, the Executive will earn a specific number of the eligible share units. In addition to the PRSUs, the Executive will earn up to 125,000 bonus shares subject to the same performance measures. The employment
agreement also includes a severance and non-competition agreement. Under this agreement, upon termination of employment under the circumstances described in the agreement, the Executive would become vested in a specified number of bonus shares. The
fair value of each PRSU and bonus share was estimated based on expected performance goals being attained and using the current public market price of the Companys common stock at June 30, 2006. As of June 30, 2006, there was $2.4
million of total unrecognized compensation expense related to the PRSUs and bonus shares. This cost is expected to be recognized over a remaining period of 3.5 years. If performance measures are not met, no future compensation expense will be
recognized and any previously recognized compensation expense will be reversed.

Stock purchase plan  The Company offers the 2004
Employee Stock Purchase Plan (the Purchase Plan) to eligible employees. An aggregate of 1.5 million shares of Company common stock may be issued under this plan subject to adjustment upon changes in capitalization. The Purchase Plan
is a compensatory benefit plan to all employees who are employed for more than 20 hours per week and meet minimum length-of-service requirements of three months. The Purchase Plan is subscribed through payroll deduction which may not exceed 10% of
the eligible employees compensation. The purchase price for shares available under the Purchase Plan is 90% of the lower of the fair market value on either the first or last day of each quarter. Compensation expense associated with the
Purchase Plan was determined using a Black-Scholes-Merton option pricing formula. Assumptions used in this formula were the same as disclosed above for incentive stock options except that an expected term of three months was used. During the three
and six months ended June 30, 2006, 5,948 shares and 11,953 shares, respectively, were subscribed for through payroll deductions under the Purchase Plan compared to 5,165 and 10,609 shares for the same periods in 2005.



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8.    EARNINGS PER COMMON SHARE

Earnings per common share was computed based on the following (in thousands, except per share amounts):



|                                        |  |                            |        |                          |   |        |  |      |        |  |   |       
|--------------------------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                        |  | Three months endedJune 30, |        | Six months endedJune 30,
|                                        |  | 2006                       |        | 2005                     |   | 2006   |  | 2005
|Net income                              |  | $                          | 11,269 |                          | $ | 8,516  |  | $    | 21,301 |  | $ | 16,274
|Basic:                                  |  |                            |        |                          |   |        |  |      |        |  |   |       
|Weighted average shares outstanding     |  |                            | 45,421 |                          |   | 45,250 |  |      | 45,379 |  |   | 45,191
|Diluted:                                |  |                            |        |                          |   |        |  |      |        |  |   |       
|Add incremental shares for:             |  |                            |        |                          |   |        |  |      |        |  |   |       
|Assumed exercise of outstanding options |  |                            | 447    |                          |   | 463    |  |      | 447    |  |   | 473   
|                                        |  |                            |        |                          |   |        |  |      |        |  |   |       
|Total                                   |  | $                          | 45,868 |                          | $ | 45,713 |  | $    | 45,826 |  | $ | 45,664
|                                        |  |                            |        |                          |   |        |  |      |        |  |   |       
|Earnings per share:                     |  |                            |        |                          |   |        |  |      |        |  |   |       
|Basic                                   |  | $                          | 0.25   |                          | $ | 0.19   |  | $    | 0.47   |  | $ | 0.36  
|                                        |  |                            |        |                          |   |        |  |      |        |  |   |       
|Diluted                                 |  | $                          | 0.25   |                          | $ | 0.19   |  | $    | 0.46   |  | $ | 0.36  
|                                        |  |                            |        |                          |   |        |  |      |        |  |   |       

The incremental shares for the assumed exercise of the outstanding options were determined by application of the
treasury stock method. The calculation of diluted earnings per share excludes 105,488 and 85,973 options outstanding for the three and six months ended June 30, 2006, and 175,816 for both the three and six month periods ended June 30,
2005, which were antidilutive.

9.    COMMITMENTS AND CONTINGENCIES

Leases  The Company leases certain office facilities and equipment under operating leases. Rent expense under all noncancelable operating lease
obligations, net of income from noncancelable subleases aggregated, was approximately $1.2 million and $2.4 million for the three and six months ended June 30, 2006 and $1.1 million and $2.0 million for the three and six months ended
June 30, 2005. There have been no significant changes in future minimum lease payments by the Company since December 31, 2005. Refer to the 2005 Form 10-K for information regarding these commitments.

Litigation  The Company has been named as a defendant in various legal actions arising in the normal course of business. In the opinion of
management, after reviewing such claims with outside counsel, resolution of these matters will not have a material adverse impact on the consolidated financial statements.

Severance and non-competition agreements  The Company has entered into severance and non-competition agreements with its chief executive officer (discussed in Note 7) and certain other executive
officers. Under the agreements with other executive officers, upon a termination of employment under the circumstances described in the agreements, each would receive: (i) two years base pay; (ii) an annual bonus for two years in an
amount equal to the highest annual bonus paid to the respective executive officer during the three years preceding termination or change in control (as defined in the agreement); (iii) continued eligibility for Company perquisites, welfare and
life insurance benefit plans, to the extent permitted, and in the event participation is not permitted, payment of the cost of such welfare benefits for a period of two years following termination of employment; (iv) payment of up to $20,000 in
job placement fees; and (v) to the extent permitted by law or the applicable plan, accelerated vesting and termination of all forfeiture provisions under all benefit plans, options, restricted stock grants or other similar awards.



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10.    FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company is a party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These
financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance
sheets. The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual or notional amount of these instruments. The Company
uses the same credit policies in making these commitments and conditional obligations as it does for on-balance sheet instruments.

The following is a
summary of the various financial instruments entered into by the Company (in thousands):



|                             |  |              |         |                  |   |        
|---------------------------- |  | ------------ | ------- | ---------------- | - | -------
|                             |  | June 30,2006 |         | December 31,2005
|Commitments to extend credit |  | $            | 925,585 |                  | $ | 832,866
|Standby letters of credit    |  |              | 77,215  |                  |   | 53,252 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total
commitment amounts disclosed above do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Company,
upon extension of credit, is based on managements credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by
the Company to guarantee the performance of a customer to a third party. The credit risk to the Company in issuing letters of credit is essentially the same as that involved in extending loan facilities to its customers.

Off-balance sheet arrangements also include an interest rate swap agreement and the Companys Trust Preferred Securities. The interest rate swap agreement has a
notional amount of $50.0 million in which the Company swapped the fixed rate to a floating rate. This swap is designated as a fair-value hedge that qualifies for the short-cut method of hedge accounting. The Companys credit
exposure on the interest rate swap is limited to its net favorable fair value, if any, and the interest payment receivable from the counterparty. Refer to the 2005 Form 10-K for information regarding the Trust Preferred Securities.

11.    REGULATORY MATTERS

Capital
requirements  The Company is subject to various regulatory capital requirements administered by the state and federal banking agencies. Any institution that fails to meet its minimum capital requirements is subject to actions by
regulators that could have a direct material effect on its financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines based on the Banks
assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Companys capital amount and classification under the regulatory framework for prompt corrective action are also subject to
qualitative judgments by the regulators.

To meet the capital adequacy requirements, Sterling Bancshares and the Bank must maintain minimum capital amounts
and ratios as defined in the regulations. Management believes, as of June 30, 2006 and December 31, 2005, that Sterling Bancshares and the Bank met all capital adequacy requirements to which they are subject.



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The most recent notification from the regulatory banking agencies categorized Sterling Bank as well
capitalized under the regulatory capital framework for prompt corrective action and there have been no events since that notification that management believes have changed the Banks category. The Companys consolidated and the
Banks capital ratios are presented in the following table:



|                                         |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|---------------------------------------- |  | ----------------------------------------- | ------- | ----- | ---------------------------- | - | ------ | ---------------------------------------------------------------------------- | ------- |  | --- | ------ |  | ----- | ------- |  | ---- | -
|                                         |  | Actual                                    |         |       | For CapitalAdequacy Purposes |   |        | To Be Categorized asWell Capitalized UnderPrompt CorrectiveAction
Provisions |        
|                                         |  | Amount                                    |         | Ratio |                              |   | Amount |                                                                              | Ratio   |  |     | Amount |  | Ratio |        
|                                         |  | (In thousands, except percentage amounts) |        
|CONSOLIDATED:                            |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|As of June 30, 2006:                     |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 397,169 |       | 11.4                         | % |        | $                                                                            | 278,486 |  | 8.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 320,042 |       | 9.2                          | % |        |                                                                              | 139,243 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 320,042 |       | 8.6                          | % |        |                                                                              | 148,067 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|                                         |  |                                           |         |       |                              |  
|As of December 31, 2005:                 |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 411,229 |       | 12.4                         | % |        | $                                                                            | 266,220 |  | 8.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 332,590 |       | 10.0                         | % |        |                                                                              | 133,110 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 332,590 |       | 9.1                          | % |        |                                                                              | 145,980 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|                                         |  |                                           |         |       |                              |  
|STERLING BANK:                           |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|As of June 30, 2006:                     |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 392,484 |       | 11.3                         | % |        | $                                                                            | 277,004 |  | 8.0 | %      |  | $     | 346,255 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 315,356 |       | 9.1                          | % |        |                                                                              | 138,502 |  | 4.0 | %      |  |       | 207,753 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 315,356 |       | 8.5                          | % |        |                                                                              | 147,874 |  | 4.0 | %      |  |       | 184,842 |  | 5.0  | %
|                                         |  |                                           |         |       |                              |  
|As of December 31, 2005:                 |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 406,444 |       | 12.2                         | % |        | $                                                                            | 265,767 |  | 8.0 | %      |  | $     | 332,209 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 327,804 |       | 9.9                          | % |        |                                                                              | 132,884 |  | 4.0 | %      |  |       | 199,326 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 327,804 |       | 9.0                          | % |        |                                                                              | 145,709 |  | 4.0 | %      |  |       | 182,137 |  | 5.0  | %

On January 1, 2004 the Company deconsolidated the outstanding trust preferred securities from its
Consolidated Financial Statements. However, trust preferred securities are still considered in calculating the Companys Tier 1 capital ratios as permitted by the Federal Reserve rules. These rules, when fully transitioned and applicable on
March 31, 2009, will limit the aggregate amount of trust preferred securities and certain other capital elements to 25% of Tier 1 capital, net of goodwill. At June 30, 2006 the entire amount of the $51.3 million of trust preferred
securities outstanding would count as Tier 1 capital. Any excess amount of trust preferred securities not qualifying for Tier 1 capital may be included in Tier 2 capital. This amount is limited to 50% of Tier 1 capital. Additionally, the final rules
provide that trust preferred securities no longer qualify for Tier 1 capital within 5 years of their maturity. Under the final transitioned rules, there would not be a material impact on the Companys consolidated capital ratios at
June 30, 2006.

Dividend restrictions  Dividends paid by Sterling Bank are subject to certain restrictions imposed by regulatory
agencies. Under these restrictions there was an aggregate of approximately $115.5 million available for payment of dividends at June 30, 2006 by the Bank. At June 30, 2006, the aggregate amount of dividends, which legally could be paid
without prior approval of various regulatory agencies, totaled approximately $46.2 million by the Bank.

12.    SUBSEQUENT EVENTS

On July 25, 2006, the Company entered into a definitive agreement to acquire through merger Kerrville, Texas-based BOTH, Inc. (BOTH),
and its subsidiary bank, Bank of the Hills. BOTH operates five banking offices in



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San Antonio/Kerrville. As of June 30, 2006, BOTH had assets of approximately $320 million, loans of $145 million, and deposits of $294 million. The
consideration for the merger will consist of a combination of stock and cash totaling approximately $72.5 million for all issued and outstanding shares of the common stock of BOTH, subject to certain prorations and adjustments. The merger agreement
has been approved by the respective Boards of Directors of the Company and BOTH, and the transactions contemplated thereby are subject to the approval of BOTH stockholders. The merger is subject to customary closing conditions including receipt of
regulatory approval, and is expected to occur during the third or fourth quarter of 2006. Additional information regarding this agreement is contained in a Form 8-K filed on July 26, 2006 with the SEC.



|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

FORWARD-LOOKING STATEMENTS

This report, other periodic reports filed by us under the Exchange Act, and other written
or oral statements made by or on behalf of the Company contain certain statements relating to future events and our future results which constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are typically identified by words such as expects, anticipates, intends, plans, believes, seeks, estimates, or words of
similar meaning, or future or conditional verbs such as should, could, or may.

Forward-looking statements reflect our
expectation or predictions of future conditions, events or results based on information currently available and involve risks and uncertainties that may cause actual results to differ materially from those in such statements. These risks and
uncertainties include, but are not limited to, the following:



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ---------------------------------------------------------------------------------------

Forward-looking statements speak only as of the date of this report. We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of this report or to reflect
the occurrence of unanticipated events except as required by federal securities laws.

For additional discussion of such risks, uncertainties and
assumptions, see the Companys Annual Report on Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission.



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OVERVIEW

For more
than 31 years, Sterling Bancshares, Inc. and Sterling Bank have served the banking needs of small to mid-sized businesses. We provide a broad array of financial services to Texas businesses and consumers through 40 banking centers in the greater
metropolitan areas of Houston, San Antonio and Dallas, Texas. These cities are the 4th, 7thand 9thlargest, respectively, in the United States based on population according to the U.S. Census Bureau. On September 30, 2005, the Company completed its acquisition of Dallas, Texas-based Prestonwood Bancshares, Inc. and its
subsidiary, The Oaks Bank & Trust Company (The Oaks Bank). The results of operations for this acquisition were included in the Companys financial results beginning in the fourth quarter of 2005.

We reported net income of $11.3 million for the second quarter ended June 30, 2006, a 32.3% increase compared to $8.5 million reported for the second quarter of
2005. Second quarter earnings were $0.25 per diluted share, up from $0.19 per diluted share for the same quarter of 2005. Net income for the six months ended June 30, 2006 was $21.3 million, or $0.46 per diluted share, compared with $16.3
million, or $0.36 per diluted share earned for the same period in 2005.

Our second quarter 2006 earnings continue to reflect favorable trends in asset
quality, loan growth and our net interest margin. We continue to see opportunities for growth in all three of the markets in which we operate. During 2006, we are introducing new products and services that will help us deepen relationships with our
customers and capitalize on opportunities for future growth.

On July 26, 2006, we announced an agreement to acquire BOTH, a Texas Corporation, and
its subsidiary, Bank of the Hills. This acquisition will enable us to expand our presence in the San Antonio/Kerrville area. Subject to satisfaction of customary closing conditions, including receipt of necessary regulatory approvals and approval of
the BOTH stockholders, we expect to close this transaction in the fourth quarter of 2006. The consideration for the merger will consist of a mixture of stock and cash totaling approximately $72.5 million. The cash portion of the merger will be
financed from available cash and short-term borrowings.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make a number of judgments, estimates and assumptions that
affect the reported amount of assets, liabilities, income and expenses in our Consolidated Financial Statements and accompanying notes. We believe that the judgments, estimates and assumptions used in the preparation of our Consolidated Financial
Statements are appropriate given the factual circumstances as of June 30, 2006.

Various elements of our accounting policies, by their nature, are
inherently subject to estimation techniques, valuation assumptions and other subjective assessments. We have identified two accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, and the sensitivity of
our Consolidated Financial Statements to those judgments, estimates and assumptions, are critical to an understanding of our Consolidated Financial Statements. These policies relate to the methodology that determines our allowance for credit losses
and the assumptions used in determining stock-based compensation.

These policies and the judgments, estimates and assumptions are described in greater
detail in the Companys 2005 Annual Report on Form 10-K in the Critical Accounting Policies section of Managements Discussion and Analysis and in Note 1 to the Consolidated Financial Statements  Organization and
Summary of Significant Accounting and Reporting Policies.

RECENT ACCOUNTING STANDARDS

Statement of Accounting StandardsNo. 123R, Share-Based Payment (Revised 2004) (SFAS 123R) established standards for accounting for transactions
in which an enterprise receives employee services in exchange for



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(a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprises equity instruments or that
may be settled by the issuance of such equity instruments. SFAS 123R applies to new awards and to awards modified, repurchased, or cancelled after January 1, 2006. The Company used the modified prospective application in implementing SFAS
123R. Beginning in 2006, the Companys results of operations reflect compensation expense for all employee stock-based compensation, including the unvested portion of stock options granted prior to 2006. Prior to 2006, the Company accounted for
stock-based employee compensation using the intrinsic value-based method of accounting, as permitted. Under the intrinsic value-based method of accounting, no compensation expense was recognized for the Companys incentive stock options or for
the Companys employee stock purchase plan. The adoption of this accounting standard resulted in additional stock-based compensation expense of $97 thousand and $204 thousand for the three and six months period ended June 30, 2006,
respectively, attributable to stock options and the Companys employee stock purchase plan. There was no income tax benefit recorded for this additional stock-based compensation expense. The adoption of this accounting standard did not have a
meaningful impact on earnings per share for the same time periods.

In February 2006, the Financial Accounting Standard Board (FASB) issued
Statement of Accounting Standards No. 155 (SFAS 155) Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140. It establishes, among other things, the accounting for certain
derivatives embedded in other financial instruments. The primary objective of this Statement with respect to FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, is to simplify accounting for any hybrid
financial instrument that contains an embedded derivative that would otherwise require bifurcation. The primary objective of this Statement with respect to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, is to eliminate a restriction on the passive derivative instruments that a qualifying special-purpose entity (QSPE) may hold. This statement is effective for all financial instruments acquired or issued after
the beginning of an entitys first fiscal year that begins after September 15, 2006. The adoption of this accounting standard is not expected to have a material impact on the Companys financial statements.

In March 2006, the FASB issued Statement of Accounting Standards No. 156 (SFAS 156) Accounting for Servicing of Financial Assets, an amendment of
FASB Statement No. 140. It establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities. This Statement amends Statement 140 to require that all separately recognized servicing assets
and servicing liabilities be initially measured at fair value, if practicable. This statement is effective for fiscal years beginning after September 15, 2006. The adoption of this accounting standard is not expected to have a material impact
on the Companys financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48) Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109
(FAS 109), Accounting for Income Taxes. FIN 48 clarifies the application of FAS 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an
enterprises financial statements. Additionally, FIN 48 provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The adoption of this accounting standard is not expected to have a material impact on the Companys financial statements.



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SELECTED FINANCIAL DATA



|                                                               |  |                                                                 |           |   |                           |   |           |                         |  |   |           |   |  |      |           |   |  |   |           |  
|-------------------------------------------------------------- |  | --------------------------------------------------------------- | --------- | - | ------------------------- | - | --------- | ----------------------- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                               |  | Three Months Ended June 30,                                     |           |   | Six Months Ended June 30, |   |           | Year Ended December 31, | 
|                                                               |  | 2006                                                            |           |   | 2005                      |   |           | 2006                    |  |   | 2005      |   |  | 2005 |          
|                                                               |  | (Dollars and shares in thousands, except for per share amounts) |          
|INCOME STATEMENT DATA:                                         |  |                                                                 |           |   |                           |   |           |                         |  |   |           |   |  |      |           |   |  |   |           |  
|Net interest income                                            |  | $                                                               | 42,813    |   |                           | $ | 36,545    |                         |  | $ | 83,505    |   |  | $    | 71,338    |   |  | $ | 150,230   |  
|Provision for credit losses                                    |  |                                                                 | 1,837     |   |                           |   | 3,221     |                         |  |   | 3,163     |   |  |      | 6,561     |   |  |   | 14,371    |  
|Noninterest income                                             |  |                                                                 | 9,019     |   |                           |   | 6,529     |                         |  |   | 15,509    |   |  |      | 13,306    |   |  |   | 26,959    |  
|Noninterest expense                                            |  |                                                                 | 33,193    |   |                           |   | 27,474    |                         |  |   | 64,151    |   |  |      | 54,390    |   |  |   | 110,646   |  
|Income before income taxes                                     |  |                                                                 | 16,802    |   |                           |   | 12,379    |                         |  |   | 31,700    |   |  |      | 23,693    |   |  |   | 52,172    |  
|Net income                                                     |  |                                                                 | 11,269    |   |                           |   | 8,516     |                         |  |   | 21,301    |   |  |      | 16,274    |   |  |   | 36,222    |  
|BALANCE SHEET DATA (at period-end):                            |  |                                                                 |           |   |                           |   |           |                         |  |   |           |   |  |      |           |   |  |   |           |  
|Total assets                                                   |  | $                                                               | 3,789,920 |   |                           | $ | 3,591,433 |                         |  | $ | 3,789,920 |   |  | $    | 3,591,433 |   |  | $ | 3,726,859 |  
|Total loans                                                    |  |                                                                 | 2,880,876 |   |                           |   | 2,583,645 |                         |  |   | 2,880,876 |   |  |      | 2,583,645 |   |  |   | 2,699,362 |  
|Allowance for loan losses                                      |  |                                                                 | 31,882    |   |                           |   | 32,209    |                         |  |   | 31,882    |   |  |      | 32,209    |   |  |   | 31,230    |  
|Total securities                                               |  |                                                                 | 575,275   |   |                           |   | 694,220   |                         |  |   | 575,275   |   |  |      | 694,220   |   |  |   | 618,998   |  
|Trading assets                                                 |  |                                                                 |          |   |                           |   | 15,556    |                         |  |   |          |   |  |      | 15,556    |   |  |   | 28,515    |  
|Total deposits                                                 |  |                                                                 | 2,984,375 |   |                           |   | 2,605,180 |                         |  |   | 2,984,375 |   |  |      | 2,605,180 |   |  |   | 2,838,143 |  
|Short-term borrowings                                          |  |                                                                 | 330,700   |   |                           |   | 503,725   |                         |  |   | 330,700   |   |  |      | 503,725   |   |  |   | 392,850   |  
|Subordinated debt                                              |  |                                                                 | 44,358    |   |                           |   | 47,956    |                         |  |   | 44,358    |   |  |      | 47,956    |   |  |   | 46,238    |  
|Junior subordinated debt                                       |  |                                                                 | 52,836    |   |                           |   | 82,475    |                         |  |   | 52,836    |   |  |      | 82,475    |   |  |   | 82,475    |  
|Shareholders equity                                           |  |                                                                 | 344,014   |   |                           |   | 325,358   |                         |  |   | 344,014   |   |  |      | 325,358   |   |  |   | 334,472   |  
|COMMON SHARE DATA:                                             |  |                                                                 |           |   |                           |   |           |                         |  |   |           |   |  |      |           |   |  |   |           |  
|Earnings per share (1)                                         |  |                                                                 |           |   |                           |   |           |                         |  |   |           |   |  |      |           |   |  |   |           |  
|Basic                                                          |  | $                                                               | 0.25      |   |                           | $ | 0.19      |                         |  | $ | 0.47      |   |  | $    | 0.36      |   |  | $ | 0.80      |  
|Diluted                                                        |  |                                                                 | 0.25      |   |                           |   | 0.19      |                         |  |   | 0.46      |   |  |      | 0.36      |   |  |   | 0.79      |  
|Shares used in computing earnings per common share             |  |                                                                 |           |   |                           |   |           |                         |  |   |           |   |  |      |           |   |  |   |           |  
|Basic                                                          |  |                                                                 | 45,421    |   |                           |   | 45,250    |                         |  |   | 45,379    |   |  |      | 45,191    |   |  |   | 45,288    |  
|Diluted                                                        |  |                                                                 | 45,868    |   |                           |   | 45,713    |                         |  |   | 45,826    |   |  |      | 45,664    |   |  |   | 45,761    |  
|End of period common shares outstanding                        |  |                                                                 | 45,411    |   |                           |   | 45,283    |                         |  |   | 45,411    |   |  |      | 45,283    |   |  |   | 45,334    |  
|Book value per common share at period-end                      |  |                                                                 |           |   |                           |   |           |                         |  |   |           |   |  |      |           |   |  |   |           |  
|Total                                                          |  | $                                                               | 7.58      |   |                           | $ | 7.19      |                         |  | $ | 7.58      |   |  | $    | 7.19      |   |  | $ | 7.38      |  
|Tangible                                                       |  |                                                                 | 5.63      |   |                           |   | 5.77      |                         |  |   | 5.63      |   |  |      | 5.77      |   |  |   | 5.42      |  
|Cash dividends paid per common share                           |  |                                                                 | 0.07      |   |                           |   | 0.06      |                         |  |   | 0.14      |   |  |      | 0.12      |   |  |   | 0.24      |  
|Common stock dividend payout ratio                             |  |                                                                 | 28.24     | % |                           |   | 31.88     | %                       |  |   | 29.81     | % |  |      | 33.32     | % |  |   | 30.00     | %
|SELECTED PERFORMANCE RATIOS AND OTHER DATA:                    |  |                                                                 |           |   |                           |   |           |                         |  |   |           |   |  |      |           |   |  |   |           |  
|Return on average common equity (2)                            |  |                                                                 | 13.10     | % |                           |   | 10.55     | %                       |  |   | 12.54     | % |  |      | 10.22     | % |  |   | 11.07     | %
|Return on average assets (2)                                   |  |                                                                 | 1.19      | % |                           |   | 0.97      | %                       |  |   | 1.14      | % |  |      | 0.95      | % |  |   | 1.02      | %
|Net interest margin                                            |  |                                                                 | 4.98      | % |                           |   | 4.54      | %                       |  |   | 4.93      | % |  |      | 4.56      | % |  |   | 4.63      | %
|Efficiency ratio                                               |  |                                                                 | 64.04     | % |                           |   | 63.78     | %                       |  |   | 64.79     | % |  |      | 64.26     | % |  |   | 62.44     | %
|Full-time equivalent employees                                 |  |                                                                 | 1,015     |   |                           |   | 951       |                         |  |   | 1,015     |   |  |      | 951       |   |  |   | 1,014     |  
|Number of banking offices                                      |  |                                                                 | 40        |   |                           |   | 35        |                         |  |   | 40        |   |  |      | 35        |   |  |   | 40        |  
|LIQUIDITY AND CAPITAL RATIOS:                                  |  |                                                                 |           |   |                           |   |           |                         |  |   |           |   |  |      |           |   |  |   |           |  
|Average loans to average deposits                              |  |                                                                 | 96.05     | % |                           |   | 98.09     | %                       |  |   | 95.99     | % |  |      | 97.19     | % |  |   | 97.67     | %
|Period-end shareholders equity to total assets                |  |                                                                 | 9.08      | % |                           |   | 9.06      | %                       |  |   | 9.08      | % |  |      | 9.06      | % |  |   | 8.97      | %
|Average shareholders equity to average assets                 |  |                                                                 | 9.11      | % |                           |   | 9.18      | %                       |  |   | 9.11      | % |  |      | 9.29      | % |  |   | 9.19      | %
|Period-end tangible capital to total tangible assets           |  |                                                                 | 6.91      | % |                           |   | 7.41      | %                       |  |   | 6.91      | % |  |      | 7.41      | % |  |   | 6.76      | %
|Tier 1 capital to risk-weighted assets                         |  |                                                                 | 9.19      | % |                           |   | 11.05     | %                       |  |   | 9.19      | % |  |      | 11.05     | % |  |   | 9.99      | %
|Total capital to risk-weighted assets                          |  |                                                                 | 11.41     | % |                           |   | 13.64     | %                       |  |   | 11.41     | % |  |      | 13.64     | % |  |   | 12.36     | %
|Tier 1 leverage ratio (Tier 1 capital to average assets)       |  |                                                                 | 8.65      | % |                           |   | 9.85      | %                       |  |   | 8.65      | % |  |      | 9.85      | % |  |   | 9.11      | %
|ASSET QUALITY RATIOS:                                          |  |                                                                 |           |   |                           |   |           |                         |  |   |           |   |  |      |           |   |  |   |           |  
|Period-end allowance for credit losses to period-end loans     |  |                                                                 | 1.14      | % |                           |   | 1.28      | %                       |  |   | 1.14      | % |  |      | 1.28      | % |  |   | 1.20      | %
|Period-end allowance for loan losses to period-end loans       |  |                                                                 | 1.11      | % |                           |   | 1.25      | %                       |  |   | 1.11      | % |  |      | 1.25      | % |  |   | 1.16      | %
|Period-end allowance for loan losses to nonperforming loans    |  |                                                                 | 257.21    | % |                           |   | 174.09    | %                       |  |   | 257.21    | % |  |      | 174.09    | % |  |   | 142.99    | %
|Nonperforming assets to period-end loans and foreclosed assets |  |                                                                 | 0.48      | % |                           |   | 0.78      | %                       |  |   | 0.48      | % |  |      | 0.78      | % |  |   | 0.83      | %
|Nonperforming loans to period-end loans                        |  |                                                                 | 0.43      | % |                           |   | 0.72      | %                       |  |   | 0.43      | % |  |      | 0.72      | % |  |   | 0.81      | %
|Nonperforming assets to period-end assets                      |  |                                                                 | 0.37      | % |                           |   | 0.56      | %                       |  |   | 0.37      | % |  |      | 0.56      | % |  |   | 0.60      | %
|Net charge-offs to average loans (2)                           |  |                                                                 | 0.16      | % |                           |   | 0.30      | %                       |  |   | 0.20      | % |  |      | 0.32      | % |  |   | 0.51      | %

---

|(1) | The calculation of diluted EPS excludes 105,488 and 85,973 options for the three and six months ended June 30, 2006 and 175,816 options for both the three and six-month periods
ended June 30, 2005, which were antidilutive.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Interim periods annualized
|--- | --------------------------



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RESULTS OF OPERATIONS

Net Income  Net income was $11.3 million for the quarter ended June 30, 2006, a 32.3% increase compared to $8.5 million reported for the second quarter of 2005. Earnings were $0.25 per diluted share in 2006s
second quarter, up from $0.19 per diluted share for the second quarter of 2005.

Net income for the six months ended June 30, 2006 was $21.3 million,
or $0.46 per diluted share, compared with $16.3 million, or $0.36 per diluted share, earned for the same period in 2005.

Details of the changes in the
various components of net income are discussed below.

Net Interest Income  Net interest income represents the amount by which interest
income on interest-earning assets, including loans and securities, exceeds interest paid on interest-bearing liabilities, including deposits and borrowings. Net interest income is our principal source of earnings. Interest rate fluctuations, as well
as changes in the amount and type of earning assets and liabilities, combine to affect net interest income.

The Federal Reserve Board significantly
influences market interest rates, including rates offered for loans and deposits by many financial institutions. Generally, when the Federal Reserve Board changes the target overnight interest rate charged by banks, the market responds with a
similar change in the prime lending rate. Beginning in June 2004, the Federal Reserve Board increased overnight interest rates by 425 basis points to 5.25% at June 30, 2006. Our net interest margin has continued to benefit from these gradual
increases in short-term interest rates. In contrast, long-term interest rates, which are impacted by various forces including national and world-wide economies and political and monetary policies, have not increased by the same amount. This has
resulted in a general flattening of the interest rate yield curve. Since our balance sheet is asset sensitive, our interest-earning assets generally reprice more quickly than our interest-bearing liabilities. However, in the current interest rate
environment, the benefit of the Companys traditionally asset-sensitive position has been negatively impacted but not eliminated.

Net interest income
was $42.8 million for the three month period ended June 30, 2006, an increase of $6.3 million or 17.2% compared to the same period in 2005. For the six-month period ended June 30, 2006, net interest income was $83.5 million, an increase of
$12.2 million or 17.1% compared to the same period in 2005. Our net interest margin was 4.98% and 4.93% for the three and six-month periods ended June 30, 2006, respectively, compared to 4.54% and 4.56% for the three and six-month periods ended
June 30, 2005, respectively. Overall, our net interest income and net interest margin were higher during the 2006 periods, as compared with 2005, due in large part to higher deposit balances that were used to fund interest-earning asset growth
and reduce short-term borrowings. Additionally, during the second quarter of 2006, we repaid $29.6 million of junior subordinated debt with an interest rate of 9.20%. The expansion of the net interest margin has been partially offset by a flatter
interest rate yield curve and higher rates paid on borrowings and deposits. Changes in the mix of interest-earning assets and liabilities influence our net interest income and net interest margin.

Average interest-earning assets for the three and six-month periods ended June 30, 2006 increased $219.8 million or 6.8% and $263.1 million or 8.3%, respectively,
over the comparable periods in 2005. The average yield earned on interest-earning assets increased 110 basis points and 105 basis points, respectively, for the same periods. The increase in interest-earning assets was due primarily to an increase in
average loans held for investment of $326.8 million or 13.1% and $343.1 million or 14.1% for the three and six months ended June 30, 2006, respectively, over the comparable periods in 2005. This increase in average loans held for investment and
increases in short-term interest rates contributed to the $13.3 million and $26.1 million increase in interest income on loans held for investment for the three and six months ended June 30, 2006, respectively, over the comparable periods in
2005. The size of the loan portfolio during 2006 as a percentage of average interest-earning assets increased from 77.4% for the first six months of 2005 to 81.4% for the same period in 2006.

On average, the securities portfolio (including trading assets) was lower by $93.6 million or 13.2% and $73.8 million or 10.6% for the three and six-month periods ended
June 30, 2006, respectively, compared to the same



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periods in 2005. We decreased the securities portfolio as a percentage of interest-earning assets through a combination of scheduled maturities, paydowns and
sales of securities beginning in 2005. Given the current rate environment and shape of the yield curve, we plan for minimal near-term growth in the investment portfolio with a floor based on the need to maintain adequate liquidity and dependent on
the short-term rate cycle. We believe we may have better investment opportunities later in 2006. On average, the available-for-sale and held-to-maturity portfolios represent 18% of average interest earning assets for the six-month period ended
June 30, 2006, down from 21% for the same period in 2005. Interest income earned on the securities portfolio decreased $434 thousand and $493 thousand for the three and six-month periods ended June 30, 2006, respectively, compared to the
same time periods in 2005. The average yield earned on the securities portfolio increased 34 basis points and 33 basis points, respectively, during the same time periods which offset the decrease in the average securities portfolio.

Average interest-bearing liabilities for the three and six-month periods ended June 30, 2006 increased $130.6 million or 5.8% and $162.1 million or 7.3%,
respectively, compared to the same periods in 2005. The average rate paid on interest-bearing liabilities increased 98 basis points and 99 basis points for the same time frames. These increases in interest-bearing liabilities were primarily due to
an increase in average interest-bearing deposits and certificates of deposit of $99.4 million and $190.4 million, respectively, for the three month period ended June 30, 2006 and $69.6 million and $202.9 million, respectively, for the six-month
period ended June 30, 2006, compared to the same periods in 2005. The average rate paid on deposits increased 99 basis points and 96 basis points for the same time periods due primarily to increases in interest rates offered on deposit
products. The increase in average deposit balances and interest rates paid resulted in additional interest expense of $5.9 million and $11.0, respectively, for the three and six-month periods ended June 30, 2006 compared to the same periods in
2005.

Average short-term borrowings for the three and six-month periods ended June 30, 2006 decreased $139.4 million or 28.2% and $100.0 million or
21.5%, respectively, compared to the same periods in 2005. These decreases in average short-term borrowings were due to increases in both average interest-bearing and noninterest-bearing deposits. The average rate paid on short-term borrowings
increased 202 basis points and 198 basis points for the three and six-month periods ended June 30, 2006, respectively, compared to the same periods in 2005, resulting in an increase in interest expense of $744 thousand and $2.2 million during
the same periods.



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Certain average balances, together with the total dollar amounts of interest income and expense and the average interest
yields/rates are included below. No tax equivalent adjustments were made (dollars in thousands).



|                                           |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  
|------------------------------------------ |  | --------------------------- | --------- | - | -------- | - | ----------------- |  | ----- | -------------- |  | - | --------- | - | ----------------- | - | ------ |  | ---- | -
|                                           |  | Three Months Ended June 30, |          
|                                           |  | (Dollars in thousands)      |          
|                                           |  | 2006                        |           |   | 2005     |  
|                                           |  | AverageBalance              |           |   | Interest |   | AverageYield/Rate |  |       | AverageBalance |  |   | Interest  |   | AverageYield/Rate |  
|Interest-Earning Assets:                   |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  
|Loans held for sale (1)                    |  | $                           | 9,434     |   |          | $ | 191               |  | 8.10  | %              |  | $ | 11,448    |   |                   | $ | 200    |  | 7.02 | %
|Loans held for investment (1):             |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  
|Taxable                                    |  |                             | 2,815,355 |   |          |   | 55,036            |  | 7.84  | %              |  |   | 2,488,633 |   |                   |   | 41,694 |  | 6.72 | %
|Non-taxable                                |  |                             | 2,388     |   |          |   | 38                |  | 6.33  | %              |  |   | 2,343     |   |                   |   | 39     |  | 6.65 | %
|Securities:                                |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  
|Taxable                                    |  |                             | 538,584   |   |          |   | 6,011             |  | 4.48  | %              |  |   | 616,753   |   |                   |   | 6,345  |  | 4.13 | %
|Non-taxable                                |  |                             | 58,533    |   |          |   | 564               |  | 3.87  | %              |  |   | 62,945    |   |                   |   | 612    |  | 3.90 | %
|Trading assets                             |  |                             | 17,969    |   |          |   | 270               |  | 6.02  | %              |  |   | 28,944    |   |                   |   | 322    |  | 4.46 | %
|Federal funds sold                         |  |                             | 3,590     |   |          |   | 43                |  | 4.87  | %              |  |   | 16,880    |   |                   |   | 122    |  | 2.89 | %
|Deposits in financial institutions         |  |                             | 2,678     |   |          |   | 32                |  | 4.88  | %              |  |   | 770       |   |                   |   | 6      |  | 3.18 | %
|                                           |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  
|Total interest-earning assets              |  |                             | 3,448,531 |   |          |   | 62,185            |  | 7.23  | %              |  |   | 3,228,716 |   |                   |   | 49,340 |  | 6.13 | %
|                                           |  |                             |           |   |          |  
|Noninterest-earning assets:                |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  
|Cash and due from banks                    |  |                             | 104,650   |   |          |   |                   |  |       |                |  |   | 89,617    |   |                   |   |        |  |      |  
|Premises and equipment, net                |  |                             | 39,831    |   |          |   |                   |  |       |                |  |   | 39,045    |   |                   |   |        |  |      |  
|Other assets                               |  |                             | 224,804   |   |          |   |                   |  |       |                |  |   | 199,954   |   |                   |   |        |  |      |  
|Allowance for loan losses                  |  |                             | (31,670   | ) |          |   |                   |  |       |                |  |   | (31,097   | ) |                   |   |        |  |      |  
|                                           |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  
|Total noninterest-earning assets           |  |                             | 337,615   |   |          |   |                   |  |       |                |  |   | 297,519   |   |                   |   |        |  |      |  
|                                           |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  
|Total assets                               |  | $                           | 3,786,146 |   |          |   |                   |  |       |                |  | $ | 3,526,235 |   |                   |   |        |  |      |  
|                                           |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  
|Interest bearing liabilities:              |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  
|Deposits:                                  |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  
|Demand and savings                         |  | $                           | 1,059,200 |   |          | $ | 3,883             |  | 1.47  | %              |  | $ | 959,832   |   |                   | $ | 1,853  |  | 0.77 | %
|Certificates and other time                |  |                             | 871,336   |   |          |   | 8,542             |  | 3.93  | %              |  |   | 680,948   |   |                   |   | 4,669  |  | 2.75 | %
|Short-term borrowings                      |  |                             | 354,102   |   |          |   | 4,413             |  | 5.00  | %              |  |   | 493,464   |   |                   |   | 3,669  |  | 2.98 | %
|Subordinated debt                          |  |                             | 44,784    |   |          |   | 1,125             |  | 10.08 | %              |  |   | 46,985    |   |                   |   | 882    |  | 7.53 | %
|Junior subordinated debt                   |  |                             | 64,887    |   |          |   | 1,409             |  | 8.71  | %              |  |   | 82,475    |   |                   |   | 1,722  |  | 8.37 | %
|                                           |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  
|Total interest-bearing liabilities         |  |                             | 2,394,309 |   |          |   | 19,372            |  | 3.25  | %              |  |   | 2,263,704 |   |                   |   | 12,795 |  | 2.27 | %
|                                           |  |                             |           |   |          |  
|Noninterest-bearing sources:               |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  
|Demand deposits                            |  |                             | 1,012,805 |   |          |   |                   |  |       |                |  |   | 910,448   |   |                   |   |        |  |      |  
|Other liabilities                          |  |                             | 34,155    |   |          |   |                   |  |       |                |  |   | 28,322    |   |                   |   |        |  |      |  
|                                           |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  
|Total noninterest-bearing liabilities      |  |                             | 1,046,960 |   |          |   |                   |  |       |                |  |   | 938,770   |   |                   |   |        |  |      |  
|Shareholders equity                       |  |                             | 344,877   |   |          |   |                   |  |       |                |  |   | 323,761   |   |                   |   |        |  |      |  
|                                           |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  
|Total liabilities and shareholders equity |  | $                           | 3,786,146 |   |          |   |                   |  |       |                |  | $ | 3,526,235 |   |                   |   |        |  |      |  
|                                           |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  
|Net interest income & margin               |  |                             |           |   |          | $ | 42,813            |  | 4.98  | %              |  |   |           |   |                   | $ | 36,545 |  | 4.54 | %
|                                           |  |                             |           |   |          |   |                   |  |       |                |  |   |           |   |                   |   |        |  |      |  

---

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



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|                                           |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|------------------------------------------ |  | ------------------------- | --------- | - | -------- | - | ----------------- |  | ---- | -------------- |  | - | --------- | - | ----------------- | - | ------ |  | ---- | -
|                                           |  | Six Months Ended June 30, |          
|                                           |  | (Dollars in thousands)    |          
|                                           |  | 2006                      |           |   | 2005     |  
|                                           |  | AverageBalance            |           |   | Interest |   | AverageYield/Rate |  |      | AverageBalance |  |   | Interest  |   | AverageYield/Rate |  
|Interest-Earning Assets:                   |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Loans held for sale (1)                    |  | $                         | 8,493     |   |          | $ | 350               |  | 8.30 | %              |  | $ | 9,808     |   |                   | $ | 347    |  | 7.13 | %
|Loans held for investment (1):             |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Taxable                                    |  |                           | 2,771,636 |   |          |   | 105,614           |  | 7.68 | %              |  |   | 2,428,303 |   |                   |   | 79,473 |  | 6.60 | %
|Non-taxable                                |  |                           | 2,454     |   |          |   | 77                |  | 6.35 | %              |  |   | 2,713     |   |                   |   | 104    |  | 7.73 | %
|Securities:                                |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Taxable                                    |  |                           | 547,892   |   |          |   | 12,160            |  | 4.48 | %              |  |   | 607,403   |   |                   |   | 12,500 |  | 4.15 | %
|Non-taxable                                |  |                           | 59,634    |   |          |   | 1,151             |  | 3.89 | %              |  |   | 63,951    |   |                   |   | 1,240  |  | 3.91 | %
|Trading assets                             |  |                           | 18,368    |   |          |   | 570               |  | 6.26 | %              |  |   | 28,368    |   |                   |   | 634    |  | 4.51 | %
|Federal funds sold                         |  |                           | 3,814     |   |          |   | 85                |  | 4.52 | %              |  |   | 11,607    |   |                   |   | 159    |  | 2.77 | %
|Deposits in financial institutions         |  |                           | 3,997     |   |          |   | 90                |  | 4.55 | %              |  |   | 994       |   |                   |   | 15     |  | 3.10 | %
|                                           |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total interest-earning assets              |  |                           | 3,416,288 |   |          |   | 120,097           |  | 7.09 | %              |  |   | 3,153,147 |   |                   |   | 94,472 |  | 6.04 | %
|                                           |  |                           |           |   |          |  
|Noninterest-earning assets:                |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Cash and due from banks                    |  |                           | 108,822   |   |          |   |                   |  |      |                |  |   | 95,930    |   |                   |   |        |  |      |  
|Premises and equipment, net                |  |                           | 40,352    |   |          |   |                   |  |      |                |  |   | 39,472    |   |                   |   |        |  |      |  
|Other assets                               |  |                           | 225,212   |   |          |   |                   |  |      |                |  |   | 198,100   |   |                   |   |        |  |      |  
|Allowance for loan losses                  |  |                           | (31,438   | ) |          |   |                   |  |      |                |  |   | (30,801   | ) |                   |   |        |  |      |  
|                                           |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total noninterest-earning assets           |  |                           | 342,948   |   |          |   |                   |  |      |                |  |   | 302,701   |   |                   |   |        |  |      |  
|                                           |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total assets                               |  | $                         | 3,759,236 |   |          |   |                   |  |      |                |  | $ | 3,455,848 |   |                   |   |        |  |      |  
|                                           |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Interest bearing liabilities:              |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Deposits:                                  |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Demand and savings                         |  | $                         | 1,054,103 |   |          | $ | 6,960             |  | 1.33 | %              |  | $ | 984,459   |   |                   | $ | 3,627  |  | 0.74 | %
|Certificates and other time                |  |                           | 839,583   |   |          |   | 15,676            |  | 3.77 | %              |  |   | 636,635   |   |                   |   | 8,041  |  | 2.55 | %
|Short-term borrowings                      |  |                           | 365,661   |   |          |   | 8,575             |  | 4.73 | %              |  |   | 465,660   |   |                   |   | 6,359  |  | 2.75 | %
|Subordinated debt                          |  |                           | 45,399    |   |          |   | 2,180             |  | 9.69 | %              |  |   | 47,020    |   |                   |   | 1,695  |  | 7.27 | %
|Junior subordinated debt                   |  |                           | 73,632    |   |          |   | 3,201             |  | 8.77 | %              |  |   | 82,475    |   |                   |   | 3,412  |  | 8.34 | %
|                                           |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total interest-bearing liabilities         |  |                           | 2,378,378 |   |          |   | 36,592            |  | 3.10 | %              |  |   | 2,216,249 |   |                   |   | 23,134 |  | 2.11 | %
|                                           |  |                           |           |   |          |  
|Noninterest-bearing sources:               |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Demand deposits                            |  |                           | 1,005,064 |   |          |   |                   |  |      |                |  |   | 890,365   |   |                   |   |        |  |      |  
|Other liabilities                          |  |                           | 33,253    |   |          |   |                   |  |      |                |  |   | 28,159    |   |                   |   |        |  |      |  
|                                           |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total noninterest-bearing liabilities      |  |                           | 1,038,317 |   |          |   |                   |  |      |                |  |   | 918,524   |   |                   |   |        |  |      |  
|Shareholders equity                       |  |                           | 342,541   |   |          |   |                   |  |      |                |  |   | 321,075   |   |                   |   |        |  |      |  
|                                           |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total liabilities and shareholders equity |  | $                         | 3,759,236 |   |          |   |                   |  |      |                |  | $ | 3,455,848 |   |                   |   |        |  |      |  
|                                           |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Net interest income & margin               |  |                           |           |   |          | $ | 83,505            |  | 4.93 | %              |  |   |           |   |                   | $ | 71,338 |  | 4.56 | %
|                                           |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  

---

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



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Noninterest IncomeNoninterest income for the three and six months ended June 30, 2006
and 2005, respectively, is summarized as follows (in thousands):



|                                          |  |                            |       |   |                          |   |       |                  |  |   |                  |   |  |   |       
|----------------------------------------- |  | -------------------------- | ----- | - | ------------------------ | - | ----- | ---------------- |  | - | ---------------- | - |  | - | ------
|                                          |  | For the Three Months Ended |       |   | For the Six Months Ended
|                                          |  | June 30,    2006           |       |   | June 30,    2005         |   |       | June 30,    2006 |  |   | June 30,    2005
|Customer service fees                     |  | $                          | 3,061 |   |                          | $ | 2,888 |                  |  | $ | 5,638            |   |  | $ | 5,880 
|Net gain (loss) on trading assets         |  |                            | (167  | ) |                          |   | (11   | )                |  |   | (302             | ) |  |   | 98    
|Net gain (loss) on the sale of securities |  |                            |      |   |                          |   | (31   | )                |  |   |                 |   |  |   | 54    
|Net gain on the sale of loans             |  |                            | 205   |   |                          |   | 417   |                  |  |   | 510              |   |  |   | 674   
|Bank owned life insurance                 |  |                            | 713   |   |                          |   | 770   |                  |  |   | 1,444            |   |  |   | 1,534 
|Debit card income                         |  |                            | 489   |   |                          |   | 433   |                  |  |   | 955              |   |  |   | 849   
|Other                                     |  |                            | 4,718 |   |                          |   | 2,063 |                  |  |   | 7,264            |   |  |   | 4,217 
|                                          |  |                            |       |   |                          |   |       |                  |  |   |                  |   |  |   |       
|                                          |  | $                          | 9,019 |   |                          | $ | 6,529 |                  |  | $ | 15,509           |   |  | $ | 13,306
|                                          |  |                            |       |   |                          |   |       |                  |  |   |                  |   |  |   |       

Net losses on trading assets for the three and six months ended June 30, 2006 were attributable to the market
conditions for these types of assets and our desire to reduce our holdings in these securities. During the second quarter of 2006, we sold our remaining trading assets but may potentially reinvest in these assets based on future market conditions.
Trading assets are carried at fair market value in our consolidated balance sheets.

Net gains on the sale of loans decreased slightly for the three and
six-month periods ended June 30, 2006 compared to the same periods in 2005. The decrease was due primarily to a decrease in the volume of loan sales.

Other noninterest income increased $2.7 million and $3.0 million, respectively, for the three and six months ended June 30, 2006 compared to the same periods in 2005. These increases are primarily due to a gain of $1.1 million on the
sale of a multi-tenant office building during the second quarter of 2006. The Company will continue to occupy the banking center located in this building. In addition, commission income and other lending fees increased $935 thousand and $1.3 million
for the three and six months ended June 30, 2006, respectively, compared to the same periods in 2005.

Noninterest Expense 
Noninterest expense for the three and six months ended June 30, 2006 and 2005, respectively, is summarized as follows (in thousands):



|                                                                                   |  |                            |        |                          |                  |   |                  |  |   |                  |   |  |   |       
|---------------------------------------------------------------------------------- |  | -------------------------- | ------ | ------------------------ | ---------------- | - | ---------------- |  | - | ---------------- | - |  | - | ------
|                                                                                   |  | For the Three Months Ended |        | For the Six Months Ended
|                                                                                   |  | June 30,    2006           |        |                          | June 30,    2005 |   | June 30,    2006 |  |   | June 30,    2005
|Salaries and employee benefits                                                     |  | $                          | 18,822 |                          |                  | $ | 15,278           |  | $ | 37,497           |   |  | $ | 30,672
|Occupancy expense                                                                  |  |                            | 4,061  |                          |                  |   | 3,909            |  |   | 7,904            |   |  |   | 7,551 
|Technology                                                                         |  |                            | 1,615  |                          |                  |   | 1,381            |  |   | 3,089            |   |  |   | 2,595 
|Professional fees                                                                  |  |                            | 1,473  |                          |                  |   | 1,630            |  |   | 2,898            |   |  |   | 2,926 
|Postage, delivery and supplies                                                     |  |                            | 903    |                          |                  |   | 778              |  |   | 1,693            |   |  |   | 1,528 
|Marketing                                                                          |  |                            | 709    |                          |                  |   | 617              |  |   | 1,093            |   |  |   | 1,262 
|Core deposit intangibles amortization                                              |  |                            | 194    |                          |                  |   | 102              |  |   | 389              |   |  |   | 214   
|Net losses (gains) and carrying costs of other real estate and foreclosed property |  |                            | (238   | )                        |                  |   | 41               |  |   | (219             | ) |  |   | 97    
|Other                                                                              |  |                            | 5,654  |                          |                  |   | 3,738            |  |   | 9,807            |   |  |   | 7,545 
|                                                                                   |  |                            |        |                          |                  |   |                  |  |   |                  |   |  |   |       
|                                                                                   |  | $                          | 33,193 |                          |                  | $ | 27,474           |  | $ | 64,151           |   |  | $ | 54,390
|                                                                                   |  |                            |        |                          |                  |   |                  |  |   |                  |   |  |   |       

Salaries and employee benefits for the three and six-month periods ended June 30, 2006 increased $3.5 million
and $6.8 million, respectively, compared to the same periods in 2005. The Company added 64 full-time equivalent employees since June 30, 2005, principally related to new office additions and to support growth.



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During the first quarter of 2006, the Company added experienced key officers to further implement its growth strategy. During the second quarter of 2006, the
Company experienced higher incentive compensation expense as we crossed higher thresholds of production and profitability. As a result, incentive compensation expense increased $929 thousand or 52% and $1.8 million or 65% for the three and six-month
periods ended June 30, 2006, respectively, compared to the same periods in 2005. In addition, profit sharing expense, which we began accruing during 2006 as the 12% ROE target stated in the plan was attained, increased $564 thousand and $996
thousand for the three and six-month periods ended June 30, 2006, respectively, compared to the same periods in 2005.

Occupancy expense increased
$152 thousand or 3.9% and $353 thousand or 4.7%, respectively, for the three and six-month periods ended June 30, 2006 compared to the same periods in 2005. These increases were due primarily to the addition of five banking centers from the
acquisition of The Oaks Bank on September 30, 2005.

Technology expense increased $234 thousand or 16.9% and $494 thousand or 19.0%, respectively, for
the three and six-month periods ended June 30, 2006 compared to the same periods in 2005. These increases were due to additional hardware and customer products including an upgrade in the Banks deposit system.

Professional fees decreased $157 thousand or 9.6% and $28 thousand or 1.0% for the three and six-month periods ended June 30, 2006, respectively, compared to the
same periods in 2005 due in part to a decrease in legal fees primarily related to a decrease in nonperforming assets.

Other noninterest expense was $5.7
million and $9.8 million for the three and six months ended June 30, 2006, respectively, up $1.9 million or 51.3% and $2.3 million or 30.0% compared with the same periods in 2005. During the second quarter of 2006, the Company prepaid $29.6
million of junior subordinated debt that carried a 9.20% interest rate. As the result of calling these securities, the Company wrote off the remaining associated unamortized debt issuance costs totaling $1.3 million.

Income Taxes  We provided $5.5 million and $10.4 million for federal and state income taxes during the three and six-month periods ended
June 30, 2006, respectively, and $3.9 million and $7.4 million, respectively, for the same periods of 2005. The effective tax rate for the three and six-month periods in 2006 was approximately 33% compared to 31% for the same periods in 2005.

FINANCIAL CONDITION

Loans Held for
Investment  The following table summarizes our loan portfolio by type, excluding loans held for sale (dollars in thousands):



|                                |  |               |           |   |                   |   |        |   |           |  |       |  
|------------------------------- |  | ------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                |  | June 30, 2006 |           |   | December 31, 2005 |  
|                                |  | Amount        |           | % |                   |   | Amount |   | %         | 
|Commercial and industrial       |  | $             | 784,856   |   | 27.5              | % |        | $ | 738,061   |  | 27.4  | %
|Real estate:                    |  |               |           |   |                   |   |        |   |           |  |       |  
|Commercial                      |  |               | 1,281,615 |   | 44.9              | % |        |   | 1,221,610 |  | 45.4  | %
|Construction                    |  |               | 520,024   |   | 18.2              | % |        |   | 438,454   |  | 16.3  | %
|Residential mortgage            |  |               | 171,581   |   | 6.0               | % |        |   | 190,701   |  | 7.1   | %
|Consumer/other                  |  |               | 71,867    |   | 2.5               | % |        |   | 72,937    |  | 2.7   | %
|Foreign loans                   |  |               | 26,718    |   | 0.9               | % |        |   | 29,245    |  | 1.1   | %
|                                |  |               |           |   |                   |   |        |   |           |  |       |  
|Total loans held for investment |  | $             | 2,856,661 |   | 100.0             | % |        | $ | 2,691,008 |  | 100.0 | %
|                                |  |               |           |   |                   |   |        |   |           |  |       |  

At June 30, 2006, loans held for investment were $2.9 billion, an increase of $165.7 million or 6.2% over
loans held for investment at December 31, 2005. This increase was due to internal loan growth. We have experienced good growth in the commercial and industrial, commercial real estate and construction lending portfolios during 2006.



28



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##### Table of Contents

Our primary lending focus is commercial loans and owner-occupied real estate loans to businesses with annual sales
ranging from $300 thousand to $30 million. At June 30, 2006, commercial real estate loans and commercial and industrial loans were 44.9% and 27.5%, respectively, of loans held for investment.

At June 30, 2006, loans held for investment were 95.7% of deposits and 75.4% of total assets. As of June 30, 2006, we had no material concentrations of loans.

Loans Held for Sale  Loans held for sale totaled were $24.2 million at June 30, 2006, as compared with $8.4 million at
December 31, 2005. Loans held for sale includes the guaranteed portion of SBA loans originated by the Bank and loans originated as part of the Banks wholesale lending operations. During the second quarter of 2006, $12.1 million of
wholesale real estate loans were reclassified from loans held for investment to loans held for sale. Due to the timing of the sales of SBA and other loans to investors, the balance of loans in the held for sale category at any given time may vary.

Trading Assets  During 2006, we sold our remaining holdings of trading assets in response to current market conditions and our desire
to reduce our holdings in these securities. We may potentially reinvest in these assets based on future market conditions.

Securities  The Companys securities portfolio at June 30, 2006 totaled $575.3 million, as compared to $619.0 million at December 31, 2005, a decrease of $43.7 million or 7.1%. We have decreased the
securities portfolio as a percentage of interest earning assets through a combination of scheduled maturities, paydowns and sales of securities.

Net
unrealized losses on the available-for-sale securities were $20.5 million at June 30, 2006 as compared to $10.7 million at December 31, 2005. Management believes that the unrealized losses on the Companys securities portfolio were
caused primarily by interest rate increases. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery
of fair value, which may be at maturity, the Company does not consider those investments to be other-than-temporarily impaired at June 30, 2006.

Deposits  The following table summarizes the Companys deposit portfolio by type (dollars in thousands):



|                                     |  |               |           |   |                   |   |        |   |           |  |       |  
|------------------------------------ |  | ------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                     |  | June 30, 2006 |           |   | December 31, 2005 |  
|                                     |  | Amount        |           | % |                   |   | Amount |   | %         | 
|Noninterest-bearing demand           |  | $             | 1,033,743 |   | 34.6              | % |        | $ | 1,045,937 |  | 36.8  | %
|Interest-bearing demand              |  |               | 1,032,465 |   | 34.6              | % |        |   | 1,017,832 |  | 35.9  | %
|Certificates and other time deposits |  |               |           |   |                   |   |        |   |           |  |       |  
|Jumbo                                |  |               | 564,365   |   | 18.9              | % |        |   | 467,672   |  | 16.5  | %
|Regular                              |  |               | 231,329   |   | 7.8               | % |        |   | 216,585   |  | 7.6   | %
|Brokered                             |  |               | 122,473   |   | 4.1               | % |        |   | 90,117    |  | 3.2   | %
|                                     |  |               |           |   |                   |   |        |   |           |  |       |  
|Total deposits                       |  | $             | 2,984,375 |   | 100.0             | % |        | $ | 2,838,143 |  | 100.0 | %
|                                     |  |               |           |   |                   |   |        |   |           |  |       |  

Total deposits as of June 30, 2006 increased $146.2 million to $3.0 billion, up 5.2% compared to $2.8 billion
at December 31, 2005. The deposit growth we experienced during the first six months of 2006 was driven primarily by interest-bearing and time deposits. The percentage of noninterest-bearing deposits to total deposits as of June 30, 2006
was 34.6%, and our loan to deposit ratio remained at 97%.

Short-term borrowings  As of June 30, 2006, we had $330.7 million in
short-term borrowings compared to $392.9 million at December 31, 2005, a decrease of $62.2 million or 15.8%. The Companys primary source of short-term borrowings is the Federal Home Loan Bank. At June 30, 2006, borrowings under FHLB
advances totaled $300 million and had maturities less than 30 days. The average interest rate on these borrowings was 5.19% at June 30, 2006. The Company utilizes these borrowings to meet liquidity needs. Maturing advances are replaced by
drawing on available cash, making additional borrowings or through increased customer deposits.



29



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##### Table of Contents

ASSET QUALITY

Risk Elements  Our nonperforming and past-due loans are substantially collateralized by assets, with any excess of loan balances over collateral values specifically allocated in the allowance for loan losses. On an
ongoing basis we receive updated appraisals on loans secured by real estate, particularly those categorized as nonperforming loans and potential problem loans. In those instances where updated appraisals reflect reduced collateral values, an
evaluation of the borrowers overall financial condition is made to determine the need, if any, for possible write-downs or appropriate additions to the allowance for loan losses.

Nonperforming assets and potential problem loans consisted of the following (dollars in thousands):



|                                                               |  |               |        |   |                   |   |        |  
|-------------------------------------------------------------- |  | ------------- | ------ | - | ----------------- | - | ------ | -
|                                                               |  | June 30, 2006 |        |   | December 31, 2005 |  
|Nonperforming and nonaccrual loans                             |  | $             | 12,395 |   |                   | $ | 21,841 |  
|Real estate acquired by foreclosure                            |  |               | 1,171  |   |                   |   | 460    |  
|Other repossessed assets                                       |  |               | 412    |   |                   |   | 137    |  
|                                                               |  |               |        |   |                   |   |        |  
|Total nonperforming assets                                     |  | $             | 13,978 |   |                   | $ | 22,438 |  
|                                                               |  |               |        |   |                   |   |        |  
|Potential problem loans                                        |  | $             | 43,846 |   |                   | $ | 58,011 |  
|                                                               |  |               |        |   |                   |   |        |  
|Accruing loans past due 90 days or more                        |  | $             | 543    |   |                   | $ | 162    |  
|                                                               |  |               |        |   |                   |   |        |  
|Period-end allowance for loan losses to nonperforming loans    |  |               | 257.21 | % |                   |   | 142.99 | %
|Nonperforming loans to period-end loans                        |  |               | 0.43   | % |                   |   | 0.81   | %
|Nonperforming assets to period-end assets                      |  |               | 0.37   | % |                   |   | 0.60   | %
|Nonperforming assets to period-end loans and foreclosed assets |  |               | 0.48   | % |                   |   | 0.83   | %

Nonperforming assets were $14.0 million at June 30, 2006, an $8.5 million decrease from December 31,
2005. Accruing loans past due 90 days or more at June 30, 2006 totaled $543 million.

Allowance for Credit Losses  The allowance
for credit losses and the related provision for credit losses are determined based on the historical credit loss experience, changes in the loan portfolio, including size, mix and risk of the individual loans, and current economic conditions. We
monitor economic conditions in our local market areas and the probable impact on borrowers, on past-due amounts, on related collateral values, on the number and size of the non-performing loans and on the resulting amount of charges-offs for the
period.

The provision for credit losses for the three and six months ended June 30, 2006 was $1.8 million and $3.2 million, respectively, as compared
to $3.2 million and $6.6 million for the same periods in 2005. The lower provision for credit losses during the three and six months ended June 30, 2006 was due to a favorable improvement in net charge-offs for this same time period and is
reflective of the general improvement in asset quality in the Company that has been a function of both a healthy Texas economy and a strengthening in our credit culture.

Net charge-offs were $1.2 million or 0.16% (annualized) and $2.8 million or 0.20% (annualized) of average loans for the three and six months ended June 30, 2006, respectively. Net charge-offs decreased $704
thousand and $1.0 million for the three and six months ended June 30, 2006, respectively, compared to the same periods in 2005. These improvements in asset quality are primarily attributable to several internal changes during the past year.
Some of these changes include: implementing a consumer and micro-business loan credit scoring system, updating and revising our loan policy, standardizing our loan funding process, improving our loan approval process and enhancing our credit culture
to take a more value-added risk management approach.

The allowance for loan losses at June 30, 2006 was $31.9 million and represented 1.11% of total
loans. The allowance for loan losses at June 30, 2006 was 257.21% of nonperforming loans, up from 142.99% at December 31, 2005, principally because of improvements in asset quality. The reserve for unfunded lending commitments was $890
thousand at June 30, 2006 as compared with $1.2 million at December 31, 2005.



30



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##### Table of Contents

The following table presents an analysis of the allowance for credit losses and other related data (dollars in
thousands):



|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                       |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                       |  | 2006                       |        |   | 2005                     |   |        | 2006 |  |   | 2005   |  
|Allowance for loan losses at beginning of period                       |  | $                          | 31,116 |   |                          | $ | 30,760 |      |  | $ | 31,230 |   |  | $ | 29,406 |  
|Charge-offs:                                                           |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Commercial, financial, and industrial                                  |  |                            | 1,393  |   |                          |   | 1,881  |      |  |   | 2,421  |   |  |   | 3,220  |  
|Real estate, mortgage and construction                                 |  |                            | 439    |   |                          |   | 1,065  |      |  |   | 1,444  |   |  |   | 1,576  |  
|Consumer                                                               |  |                            | 253    |   |                          |   | 323    |      |  |   | 366    |   |  |   | 838    |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total charge-offs                                                      |  |                            | 2,085  |   |                          |   | 3,269  |      |  |   | 4,231  |   |  |   | 5,634  |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Recoveries                                                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Commercial, financial, and industrial                                  |  |                            | 782    |   |                          |   | 721    |      |  |   | 1,167  |   |  |   | 1,034  |  
|Real estate, mortgage and construction                                 |  |                            | 2      |   |                          |   | 605    |      |  |   | 5      |   |  |   | 610    |  
|Consumer                                                               |  |                            | 145    |   |                          |   | 83     |      |  |   | 265    |   |  |   | 152    |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total recoveries                                                       |  |                            | 929    |   |                          |   | 1,409  |      |  |   | 1,437  |   |  |   | 1,796  |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net charge-offs                                                        |  |                            | 1,156  |   |                          |   | 1,860  |      |  |   | 2,794  |   |  |   | 3,838  |  
|Provision for loan losses                                              |  |                            | 1,922  |   |                          |   | 3,309  |      |  |   | 3,446  |   |  |   | 6,641  |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Allowance for loan losses at end of period                             |  |                            | 31,882 |   |                          |   | 32,209 |      |  |   | 31,882 |   |  |   | 32,209 |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Reserve for losses on unfunded loan commitments at beginning of period |  |                            | 975    |   |                          |   | 834    |      |  |   | 1,173  |   |  |   | 826    |  
|Provision for losses on unfunded loan commitments                      |  |                            | (85    | ) |                          |   | (88    | )    |  |   | (283   | ) |  |   | (80    | )
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Reserve for losses on unfunded loan commitments at end of period       |  |                            | 890    |   |                          |   | 746    |      |  |   | 890    |   |  |   | 746    |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Total allowance for credit losses                                      |  | $                          | 32,772 |   |                          | $ | 32,955 |      |  | $ | 32,772 |   |  | $ | 32,955 |  
|                                                                       |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Period-end allowance for credit losses to period-end loans             |  |                            | 1.14   | % |                          |   | 1.28   | %    |  |   | 1.14   | % |  |   | 1.28   | %
|Period-end allowance for loan losses to period-end loans               |  |                            | 1.11   | % |                          |   | 1.25   | %    |  |   | 1.11   | % |  |   | 1.25   | %
|Period-end allowance for loan losses to nonperforming loans            |  |                            | 257.21 | % |                          |   | 174.09 | %    |  |   | 257.21 | % |  |   | 174.09 | %
|Nonperforming assets to period-end loans and foreclosed assets         |  |                            | 0.48   | % |                          |   | 0.78   | %    |  |   | 0.48   | % |  |   | 0.78   | %
|Nonperforming loans to period-end loans                                |  |                            | 0.43   | % |                          |   | 0.72   | %    |  |   | 0.43   | % |  |   | 0.72   | %
|Nonperforming assets to period-end assets                              |  |                            | 0.37   | % |                          |   | 0.56   | %    |  |   | 0.37   | % |  |   | 0.56   | %
|Net charge-offs to average loans (annualized)                          |  |                            | 0.16   | % |                          |   | 0.30   | %    |  |   | 0.20   | % |  |   | 0.32   | %

INTEREST RATE SENSITIVITY

Interest rate risk is the risk to interest income attributed to the repricing characteristics of interest sensitive assets and liabilities. An interest sensitive asset or liability is one that experiences changes in
cashflows as a direct result of changes in market interest rates.

We manage interest rate risk by positioning the balance sheet to maximize net interest
income while maintaining an acceptable level of risk, remaining mindful of the relationship between profitability, liquidity and interest rate risk. The overall interest rate risk position and strategies for the management of interest rate risk are
reviewed by senior management, the Asset/Liability Management Committee and our Board of Directors on an ongoing basis.

We measure interest rate risk
using a variety of methodologies including, but not limited to, dynamic simulation analysis, gap analysis and static balance sheet rate shocks. Dynamic simulation analysis is the primary tool used to measure interest rate risk and allow us to model
the effects of non-parallel movements in multiple yield curves, changes in borrower and depositor behaviors, changes in loan and deposit pricing, and changes in loan and deposit portfolio compositions and growth rates over a 24-month horizon.



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We utilize static balance sheet rate shocks to estimate the potential impact on net interest income of changes in
interest rates under various rate scenarios. This analysis estimates a percentage of change in these metrics from the stable rate base scenario versus alternative scenarios of rising and falling market interest rates by instantaneously shocking a
static balance sheet. The following table summarizes the simulated change over a 12-month horizon as of June 30, 2006 and December 31, 2005:



|                  |  |                                          |  |                                        |  
|----------------- |  | ---------------------------------------- |  | -------------------------------------- | -
|                  |  | Changes in Interest
Rates (Basis Points) |  | Increase(Decrease)in NetInterestIncome |  
|June 30, 2006     |  |                                          | 
|                  |  | +200                                     |  | 5.39                                   | %
|                  |  | +100                                     |  | 2.74                                   | %
|                  |  | Base                                     |  | 0.00                                   | %
|                  |  | -100                                     |  | -2.92                                  | %
|                  |  | -200                                     |  | -8.62                                  | %
|                  | 
|December 31, 2005 |  |                                          | 
|                  |  | +200                                     |  | 6.59                                   | %
|                  |  | +100                                     |  | 3.45                                   | %
|                  |  | Base                                     |  | 0.00                                   | %
|                  |  | -100                                     |  | -3.43                                  | %
|                  |  | -200                                     |  | -10.68                                 | %

Each rate scenario reflects unique prepayment and repricing assumptions. Because of uncertainties related to
customer behaviors, loan and deposit pricing levels, competitor behaviors, and socio-economic factors that could effect the shape of the yield curves, this analysis is not intended to and does not provide a precise forecast of the affect actual
changes in market rates will have on the Company. The interest rate sensitivity analysis includes assumptions that (i) the composition of our interest sensitive assets and liabilities existing at period-end will remain constant over the
measurement period; and (ii) changes in market rates are parallel and instantaneous across the yield curve regardless of duration or repricing characteristics of specific assets or liabilities. Further, this analysis does not contemplate any
actions that we might undertake in response to changes in market factors. Accordingly, this analysis is not intended to and does not provide a precise forecast of the affect actual changes in market rates will have on the Company.

During July of 2006, the Company executed a hedging strategy utilizing interest rate derivatives designed as a means to mitigate some of the Companys asset
sensitivity. The Company purchased an interest rate floor contract with a notional amount of $113 million and a strike rate of 8.00% and an interest rate collar contract with a notional amount of $250 million with an 8.42% interest rate cap and an
8.0% interest rate floor. These contracts were designated as cash flow hedges of the monthly interest receipts from the Companys portfolio of variable-rate loans. The interest rate floor and interest rate collar contracts have termination
dates of August 1, 2009 and August 1, 2010, respectively.

CAPITAL AND LIQUIDITY

Capital  At June 30, 2006, shareholders equity totaled $344.0 million or 9.08% of total assets, as compared to $334.5 million or 8.97% of
total assets at December 31, 2005. Our risk-based capital ratios together with the minimum capital amounts and ratios at June 30, 2006 were as follows (dollars in thousands):



|                                         |  |        |         |       |                                     |   |        |   |         |  |     |  
|---------------------------------------- |  | ------ | ------- | ----- | ----------------------------------- | - | ------ | - | ------- |  | --- | -
|                                         |  | Actual |         |       | For MinimumCapital AdequacyPurposes |  
|                                         |  | Amount |         | Ratio |                                     |   | Amount |   | Ratio   | 
|Total capital (to risk weighted assets)  |  | $      | 397,169 |       | 11.4                                | % |        | $ | 278,486 |  | 8.0 | %
|Tier 1 capital (to risk weighted assets) |  |        | 320,042 |       | 9.2                                 | % |        |   | 139,243 |  | 4.0 | %
|Tier 1 capital (to average assets)       |  |        | 320,042 |       | 8.6                                 | % |        |   | 148,067 |  | 4.0 | %

See Note 11 to our Consolidated Financial Statements for further discussion of regulatory capital requirements.



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Liquidity  The objectives of our liquidity management is to maintain our ability to meet day-to-day
deposit withdrawals and other payment obligations, to raise funds to support asset growth, to maintain reserve requirements and otherwise operate on an ongoing basis. We strive to manage a liquidity position sufficient to meet operating requirements
while maintaining an appropriate balance between assets and liabilities to meet the expectations of our shareholders. In recent years, our liquidity needs have primarily been met by growth in deposits including brokered certificates of deposit. In
addition to deposits, we have access to funds from correspondent banks and from the Federal Home Loan Bank, supplemented by cash flows from amortizing securities and loan portfolios. For more information regarding liquidity, please refer to our 2005
Annual Report on Form 10-K.

Sterling Bancshares must provide for its own liquidity and fund its own obligations. The primary source of Sterling
Bancshares revenues is from dividends declared by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to Sterling Bancshares. Under these provisions, there was an aggregate of
approximately $115.5 million available for payment of dividends at June 30, 2006, by the Bank. At June 30, 2006, the aggregate amount of dividends, which legally could be paid without prior approval of various regulatory agencies, totaled
$46.2 million. It is not anticipated that such restrictions will have an impact on the ability of Sterling Bancshares to meet its ongoing cash obligations. As of June 30, 2006, we did not have any material commitments for capital expenditures.

On May 8, 2006, Sterling Bancshares prepaid all of its $29.6 million 9.20% Junior Subordinated Deferrable Interest Debentures. The payment of these
Debentures was funded by a dividend from the Bank. Our planned acquisition of BOTH, Inc. is expected to close in the fourth quarter of 2006. The cash portion of the total purchase price will be financed from available cash and short-term borrowings.

On April 25, 2005, the Companys Board of Directors authorized the repurchase of up to 2,500,000 shares of common stock, not to exceed 500,000
shares in any calendar year. The Company may repurchase shares of its common stock from time to time in the open market or through privately negotiated transactions. The table below lists the Companys purchases of its equity securities
registered pursuant to Section 12 of the Exchange Act during the quarter ended June 30 2006:



|                               |  |                                  |  |                                       |       |                                                                    |         |                                                |          
|------------------------------ |  | -------------------------------- |  | ------------------------------------- | ----- | ------------------------------------------------------------------ | ------- | ---------------------------------------------- | ---------
|Period                         |  | Total Number of Shares Purchased |  | Weighted Average Price Paid per Share |       | Total Number of SharesPurchased as Part of PubliclyAnnounced Plans |         | Shares That May YetBe Purchased Under thePlans
|April 1, 2006 toApril 30, 2006 |  | 48,000                           |  | $                                     | 17.71 |                                                                    | 298,000 |                                                | 2,202,000
|May 1, 2006 toMay 31, 2006     |  | 66,000                           |  | $                                     | 16.66 |                                                                    | 364,000 |                                                | 2,136,000
|June 1, 2006 toJune 30, 2006   |  | 11,000                           |  | $                                     | 17.01 |                                                                    | 375,000 |                                                | 2,125,000



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|------- | -----------------------------------------------------------

There
have been no material changes in market risk we face since December 31, 2005. For information regarding the market risk of our financial instruments, see Managements Discussion and Analysis of Financial Condition and Results of
Operations  Interest Rate Sensitivity. Our principal market risk exposure is to interest rates.



|ITEM 4. | CONTROLS AND PROCEDURES.
|------- | ------------------------

Evaluation of Disclosure Controls
and Procedures  As of the end of the period covered by this report, an evaluation was made by the Companys management, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures were effective as of the end of the period.

There were no changes in the Companys internal control over financial
reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the Companys internal control over financial
reporting.



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##### Table of Contents

PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS.
|------- | ------------------

Not
applicable.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

Information regarding risk factors appears in
Managements Discussion and Analysis of Financial Condition and Results of Operations  Forward-Looking Statements, in Part I  Item 2 of this Form 10-Q and in Part I  Item 1A of our Annual Report on Form 10-K for
the fiscal year ended December 31, 2005. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.



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

Not applicable.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------

Not applicable.



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

The
Companys Annual Meeting of Stockholders was held on April 24, 2006, to consider and vote on the following proposals:

Proposal 1: The Election of Directors

The following individual was nominated and elected as a Class I director to hold office until the 2008
annual meeting of the stockholders of the Company or until his successor has been duly elected and qualified.



|                     |  |            |  |          
|-------------------- |  | ---------- |  | ---------
|                     |  | For        |  | Withheld 
|J. Downey Bridgwater |  | 36,998,427 |  | 3,740,669

The following individuals were nominated and elected as Class II directors to hold office until the 2009 annual
meeting of the stockholders of the Company or until their successors have been duly elected and qualified.



|                   |  |            |  |          
|------------------ |  | ---------- |  | ---------
|                   |  | For        |  | Withheld 
|David L. Hatcher   |  | 39,139,689 |  | 1,594,407
|                   |  |           
|G. Edward Powell   |  | 38,922,886 |  | 1,816,210
|                   |  |           
|Raimundo Riojas E. |  | 37,985,811 |  | 2,758,285
|                   |  |           
|Dan C. Tutcher     |  | 39,158,383 |  | 1,580,713
|                   |  |           
|Max W. Wells       |  | 37,864,954 |  | 2,869,143

The following directors continued in office after the annual meeting:



|                   |  |                 
|------------------ |  | ----------------
|George Beatty, Jr. |  | Glenn H. Johnson
|                   | 
|Anat Bird          |  | R. Bruce LaBoon 
|                   | 
|James D. Calaway   |  | Thomas A. Reiser
|                   | 
|Bruce J. Harper    |  |                 



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##### Table of Contents

Proposal 2: Ratification of the appointment of Deloitte & Touche LLP as the Companys independent
registered public accounting firm for its fiscal year ending December 31, 2006.



|           |  |           |  |        
|---------- |  | --------- |  | -------
|For        |  | Against   |  | Abstain
|37,912,200 |  | 2,789,193 |  | 34,302 



|ITEM 5. | OTHER INFORMATION.
|------- | ------------------

Not
applicable.



|ITEM 6. | EXHIBITS.
|------- | ---------



|         |  |                                                                                                                                                                    
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         | 
|11      |  | Statement Regarding Computation of Earnings Per Share (included as Note (8) to Consolidated Financial Statements on page 16 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, Chairman, 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  |  | Section 1350 Certification of the Chief Executive Officer.                                                                                                         
|         | 
|**32.2  |  | Section 1350 Certification of the Chief Financial Officer.                                                                                                         

---

|* | As filed herewith.
|- | ------------------

|** | As furnished herewith.
|-- | ----------------------



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused the report to
be signed on its behalf by the undersigned thereunto duly authorized.



|                     |  |  |  |                           |  |                             |  |                                             
|-------------------- |  |  |  | ------------------------- |  | --------------------------- |  | --------------------------------------------
|                     |  |  |  | STERLING BANCSHARES, INC.
|                     |  |  | 
|Date: August 7, 2006 |  |  |  | By:                       |  | /S/    J. DOWNEY
BRIDGWATER
|                     |  |  |  |                           |  |                             |  | J. Downey Bridgwater                        
|                     |  |  |  |                           |  |                             |  | Chairman, President and                     
|                     |  |  |  |                           |  |                             |  | Chief Executive Officer                     
|                     |  |  |  |                           |  |                             |  | (Principal executive officer)               
|                     |  |  | 
|Date: August 7, 2006 |  |  |  | By:                       |  | /S/    STEPHEN C.
RAFFAELE 
|                     |  |  |  |                           |  |                             |  | Stephen C. Raffaele                         
|                     |  |  |  |                           |  |                             |  | Executive Vice President                    
|                     |  |  |  |                           |  |                             |  | and Chief Financial Officer                 
|                     |  |  |  |                           |  |                             |  | (Principal financial and accounting officer)



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##### Table of Contents

EXHIBIT INDEX



|         |  |                                                                                                                                                                    
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit  |  | Description                                                                                                                                                        
|         | 
|11      |  | Statement Regarding Computation of Earnings Per Share (included as Note (8) to Consolidated Financial Statements on page 16 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, Chairman, 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  |  | Section 1350 Certification of the Chief Executive Officer.                                                                                                         
|         | 
|**32.2  |  | Section 1350 Certification of the Chief Financial Officer.                                                                                                         

---

|* | As filed herewith.
|- | ------------------

|** | As furnished herewith.
|-- | ----------------------



37