##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended March 31, 2007

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



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STERLING BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



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|                                |  |                    
|------------------------------- |  | -------------------
|Texas                           |  | 74-2175590         
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | 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 May 4, 2007
|[Common Stock, $1.00 par value per share] |  | 74,412,437 shares         



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##### Table of Contents

STERLING BANCSHARES, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2007

TABLE OF CONTENTS



|           |  |                                                                                       |  |   
|---------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I.    |  | FINANCIAL INFORMATION                                                                 |  |   
|           |  |                                                                                      
|Item 1.    |  | Financial Statements (Unaudited)                                                      |  |   
|           |  |                                                                                      
|           |  | 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                            |  | 30
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 30
|           |  |                                                                                      
|PART II.   |  | OTHER INFORMATION                                                                     |  |   
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 30
|           |  |                                                                                      
|Item 1A.   |  | Risk Factors                                                                          |  | 30
|           |  |                                                                                      
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 30
|           |  |                                                                                      
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 31
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 31
|           |  |                                                                                      
|Item 5.    |  | Other Information                                                                     |  | 31
|           |  |                                                                                      
|Item 6.    |  | Exhibits                                                                              |  | 31
|           |  |                                                                                      
|SIGNATURES |  |                                                                                       |  | 32



1



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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)

|                                                                                                                                                                                            |  |           |           |   |              |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | --------- | - | ------------ | - | --------- | -
|                                                                                                                                                                                            |  | March 31, |           |   | December 31, |  
|                                                                                                                                                                                            |  | 2007      |           |   | 2006         |  
|ASSETS                                                                                                                                                                                      |  |           |           |   |              |   |           |  
|Cash and cash equivalents                                                                                                                                                                   |  | $         | 189,207   |   |              | $ | 134,775   |  
|Interest-bearing deposits in financial institutions                                                                                                                                         |  |           | 99        |   |              |   | 198       |  
|Trading assets                                                                                                                                                                              |  |           | 85        |   |              |   |          |  
|Available-for-sale securities, at fair value                                                                                                                                                |  |           | 435,255   |   |              |   | 409,351   |  
|Held-to-maturity securities, at amortized cost                                                                                                                                              |  |           | 165,277   |   |              |   | 164,263   |  
|                                                                                                                                                                                            |  |          
|Loans held for sale                                                                                                                                                                         |  |           | 52,962    |   |              |   | 54,722    |  
|Loans held for investment                                                                                                                                                                   |  |           | 3,186,601 |   |              |   | 3,077,845 |  
|                                                                                                                                                                                            |  |           |           |   |              |   |           |  
|Total loans                                                                                                                                                                                 |  |           | 3,239,563 |   |              |   | 3,132,567 |  
|Allowance for loan losses                                                                                                                                                                   |  |           | (33,487   | ) |              |   | (32,027   | )
|                                                                                                                                                                                            |  |           |           |   |              |   |           |  
|Loans, net                                                                                                                                                                                  |  |           | 3,206,076 |   |              |   | 3,100,540 |  
|                                                                                                                                                                                            |  |          
|Premises and equipment, net                                                                                                                                                                 |  |           | 25,762    |   |              |   | 23,475    |  
|Real estate acquired by foreclosure                                                                                                                                                         |  |           | 2,624     |   |              |   | 1,465     |  
|Goodwill                                                                                                                                                                                    |  |           | 159,958   |   |              |   | 130,858   |  
|Core deposit intangibles, net                                                                                                                                                               |  |           | 13,966    |   |              |   | 10,299    |  
|Accrued interest receivable                                                                                                                                                                 |  |           | 18,840    |   |              |   | 18,692    |  
|Other assets                                                                                                                                                                                |  |           | 118,161   |   |              |   | 123,643   |  
|                                                                                                                                                                                            |  |           |           |   |              |   |           |  
|TOTAL ASSETS                                                                                                                                                                                |  | $         | 4,335,310 |   |              | $ | 4,117,559 |  
|                                                                                                                                                                                            |  |           |           |   |              |   |           |  
|                                                                                                                                                                                            |  |          
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                        |  |           |           |   |              |   |           |  
|LIABILITIES:                                                                                                                                                                                |  |           |           |   |              |   |           |  
|Deposits:                                                                                                                                                                                   |  |           |           |   |              |   |           |  
|Noninterest-bearing demand                                                                                                                                                                  |  | $         | 1,132,744 |   |              | $ | 1,058,135 |  
|Interest-bearing demand                                                                                                                                                                     |  |           | 1,320,245 |   |              |   | 1,229,313 |  
|Certificates and other time                                                                                                                                                                 |  |           | 1,202,715 |   |              |   | 1,047,163 |  
|                                                                                                                                                                                            |  |           |           |   |              |   |           |  
|Total deposits                                                                                                                                                                              |  |           | 3,655,704 |   |              |   | 3,334,611 |  
|Short-term borrowings                                                                                                                                                                       |  |           | 32,439    |   |              |   | 220,675   |  
|Subordinated debt                                                                                                                                                                           |  |           | 46,467    |   |              |   | 46,135    |  
|Junior subordinated debt                                                                                                                                                                    |  |           | 82,734    |   |              |   | 56,959    |  
|Accrued interest payable and other liabilities                                                                                                                                              |  |           | 72,547    |   |              |   | 49,894    |  
|                                                                                                                                                                                            |  |           |           |   |              |   |           |  
|Total liabilities                                                                                                                                                                           |  |           | 3,889,891 |   |              |   | 3,708,274 |  
|                                                                                                                                                                                            |  |          
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                               |  |           |          |   |              |   |          |  
|                                                                                                                                                                                            |  |          
|SHAREHOLDERS EQUITY:                                                                                                                                                                       |  |           |           |   |              |   |           |  
|Preferred stock, $1 par value, 1,000,000 shares authorized, no shares issued and outstanding at March 31, 2007 and December 31,
2006                                                        |  |           |          |   |              |   |          |  
|Common stock, $1 par value, 100,000,000 shares authorized, 74,526,224 and 71,938,175 issued and 73,401,224 and 71,000,675 outstanding at
March 31, 2007 and December 31, 2006, respectively |  |           | 74,526    |   |              |   | 71,938    |  
|Capital surplus                                                                                                                                                                             |  |           | 106,926   |   |              |   | 80,927    |  
|Retained earnings                                                                                                                                                                           |  |           | 280,375   |   |              |   | 272,179   |  
|Treasury stock, at cost, 1,125,000 and 937,500 shares held at March 31, 2007 and December 31, 2006, respectively                                                                            |  |           | (13,150   | ) |              |   | (10,902   | )
|Accumulated other comprehensive loss, net of tax                                                                                                                                            |  |           | (3,258    | ) |              |   | (4,857    | )
|                                                                                                                                                                                            |  |           |           |   |              |   |           |  
|Total shareholders equity                                                                                                                                                                  |  |           | 445,419   |   |              |   | 409,285   |  
|                                                                                                                                                                                            |  |           |           |   |              |   |           |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                  |  | $         | 4,335,310 |   |              | $ | 4,117,559 |  
|                                                                                                                                                                                            |  |           |           |   |              |   |           |  

See Notes to Consolidated Financial Statements.



2



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##### Table of Contents

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except
per share amounts)



|                                                      |  |                 |        |      |   |        |  
|----------------------------------------------------- |  | --------------- | ------ | ---- | - | ------ | -
|                                                      |  | Three Months    |       
|                                                      |  | Ended March 31, |       
|                                                      |  | 2007            |        | 2006 |  
|Interest income:                                      |  |                 |        |      |   |        |  
|Loans, including fees                                 |  | $               | 61,350 |      | $ | 50,776 |  
|Securities:                                           |  |                 |        |      |   |        |  
|Taxable                                               |  |                 | 5,461  |      |   | 6,149  |  
|Non-taxable                                           |  |                 | 877    |      |   | 587    |  
|Trading assets                                        |  |                 | 1      |      |   | 300    |  
|Federal funds sold                                    |  |                 | 148    |      |   | 42     |  
|Deposits in financial institutions                    |  |                 | 17     |      |   | 58     |  
|                                                      |  |                 |        |      |   |        |  
|Total interest income                                 |  |                 | 67,854 |      |   | 57,912 |  
|                                                      |  |                 |        |      |   |        |  
|Interest expense:                                     |  |                 |        |      |   |        |  
|Demand and savings deposits                           |  |                 | 6,039  |      |   | 3,077  |  
|Certificates and other time deposits                  |  |                 | 12,350 |      |   | 7,134  |  
|Short-term borrowings                                 |  |                 | 2,495  |      |   | 4,162  |  
|Subordinated debt                                     |  |                 | 1,150  |      |   | 1,055  |  
|Junior subordinated debt                              |  |                 | 1,231  |      |   | 1,792  |  
|                                                      |  |                 |        |      |   |        |  
|Total interest expense                                |  |                 | 23,265 |      |   | 17,220 |  
|                                                      |  |                 |        |      |   |        |  
|Net interest income                                   |  |                 | 44,589 |      |   | 40,692 |  
|Provision for credit losses                           |  |                 | 370    |      |   | 1,326  |  
|                                                      |  |                 |        |      |   |        |  
|Net interest income after provision for credit losses |  |                 | 44,219 |      |   | 39,366 |  
|                                                      |  |                 |        |      |   |        |  
|Noninterest income:                                   |  |                 |        |      |   |        |  
|Customer service fees                                 |  |                 | 3,375  |      |   | 2,577  |  
|Net gain (loss) on trading assets                     |  |                 | 1      |      |   | (135   | )
|Net gain on the sale of loans                         |  |                 | 504    |      |   | 305    |  
|Other                                                 |  |                 | 4,054  |      |   | 3,743  |  
|                                                      |  |                 |        |      |   |        |  
|Total noninterest income                              |  |                 | 7,934  |      |   | 6,490  |  
|                                                      |  |                 |        |      |   |        |  
|Noninterest expense:                                  |  |                 |        |      |   |        |  
|Salaries and employee benefits                        |  |                 | 19,688 |      |   | 18,675 |  
|Occupancy                                             |  |                 | 4,362  |      |   | 3,843  |  
|Technology                                            |  |                 | 2,049  |      |   | 1,474  |  
|Professional fees                                     |  |                 | 945    |      |   | 1,425  |  
|Postage, delivery and supplies                        |  |                 | 811    |      |   | 790    |  
|Marketing                                             |  |                 | 355    |      |   | 384    |  
|Core deposit intangibles amortization                 |  |                 | 420    |      |   | 194    |  
|Acquisition costs                                     |  |                 | 754    |      |   |       |  
|Other                                                 |  |                 | 4,450  |      |   | 4,173  |  
|                                                      |  |                 |        |      |   |        |  
|Total noninterest expense                             |  |                 | 33,834 |      |   | 30,958 |  
|                                                      |  |                 |        |      |   |        |  
|Income before income taxes                            |  |                 | 18,319 |      |   | 14,898 |  
|Provision for income taxes                            |  |                 | 6,396  |      |   | 4,866  |  
|                                                      |  |                 |        |      |   |        |  
|Net Income                                            |  | $               | 11,923 |      | $ | 10,032 |  
|                                                      |  |                 |        |      |   |        |  
|Earnings per share:                                   |  |                 |        |      |   |        |  
|Basic                                                 |  | $               | 0.17   |      | $ | 0.15   |  
|                                                      |  |                 |        |      |   |        |  
|Diluted                                               |  | $               | 0.17   |      | $ | 0.15   |  
|                                                      |  |                 |        |      |   |        |  

See Notes to Consolidated Financial Statements.



3



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##### Table of Contents

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(UNAUDITED)

(In
thousands)



|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------------------------------------- |  | --------------- |  | ------------ | - | -------------- | ------ | ---------------- | - | ------ | -------------- | - | ------- | ---------------------------------- | ------ | ------- | ------ |  | ----- |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                     |  | Preferred Stock |  | Common Stock |   | CapitalSurplus |        | RetainedEarnings |   |        | Treasury Stock |   |         | Accumulated OtherComprehensiveLoss |        |         | Total  | 
|                                                                                                     |  | Shares          |  | Amount       |   | Shares         |        | Amount           |   |        |                |   |         |                                    | Shares |         | Amount |  |       |  |   |         |   | 
|BALANCE AT JANUARY 1, 2006                                                                           |  |                |  | $            |  |                | 68,187 |                  | $ | 68,187 |                | $ | 36,028  |                                    | $      | 239,171 |        |  | 188   |  | $ | (1,984  | ) |  | $ | (6,930 | ) |  | $ | 334,472 |  
|Comprehensive income:                                                                                |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                                                           |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        | 10,032  |        |  |       |  |   |         |   |  |   |        |   |  |   | 10,032  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of ($1,458) |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   | (2,708 | ) |  |   | (2,708  | )
|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                           |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   | 7,324   |  
|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                             |  |                 |  |              |   |                | 356    |                  |   | 356    |                |   | 3,287   |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   | 3,643   |  
|Repurchase of common stock                                                                           |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  | 188   |  |   | (1,991  | ) |  |   |        |   |  |   | (1,991  | )
|Cash dividends paid                                                                                  |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        | (3,167  | )      |  |       |  |   |         |   |  |   |        |   |  |   | (3,167  | )
|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT MARCH 31, 2006                                                                            |  |                |  | $            |  |                | 68,543 |                  | $ | 68,543 |                | $ | 39,315  |                                    | $      | 246,036 |        |  | 376   |  | $ | (3,975  | ) |  | $ | (9,638 | ) |  | $ | 340,281 |  
|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   |         |  
|                                                                                                     |  |                 |  |              |   |                |        |                  |   |       
|BALANCE AT JANUARY 1, 2007                                                                           |  |                |  | $            |  |                | 71,938 |                  | $ | 71,938 |                | $ | 80,927  |                                    | $      | 272,179 |        |  | 938   |  | $ | (10,902 | ) |  | $ | (4,857 | ) |  | $ | 409,285 |  
|Comprehensive income:                                                                                |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                                                           |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        | 11,923  |        |  |       |  |   |         |   |  |   |        |   |  |   | 11,923  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of $638     |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   | 1,186  |   |  |   | 1,186   |  
|Net change in unrealized gains on effective cash flow hedging derivatives, net of taxes of $222      |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   | 413    |   |  |   | 413     |  
|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                           |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   | 13,522  |  
|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                             |  |                 |  |              |   |                | 243    |                  |   | 243    |                |   | 1,823   |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   | 2,066   |  
|Issuance of common stock inconnection with the purchase                                              |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   |         |  
|of Partners Bank of Texas                                                                            |  |                 |  |              |   |                | 2,345  |                  |   | 2,345  |                |   | 24,176  |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   | 26,521  |  
|Repurchase of common stock                                                                           |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  | 187   |  |   | (2,248  | ) |  |   |        |   |  |   | (2,248  | )
|Cash dividends paid                                                                                  |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        | (3,727  | )      |  |       |  |   |         |   |  |   |        |   |  |   | (3,727  | )
|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT MARCH 31, 2007                                                                            |  |                |  | $            |  |                | 74,526 |                  | $ | 74,526 |                | $ | 106,926 |                                    | $      | 280,375 |        |  | 1,125 |  | $ | (13,150 | ) |  | $ | (3,258 | ) |  | $ | 445,419 |  
|                                                                                                     |  |                 |  |              |   |                |        |                  |   |        |                |   |         |                                    |        |         |        |  |       |  |   |         |   |  |   |        |   |  |   |         |  

See Notes to Consolidated Financial Statements.



4



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##### Table of Contents

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



|                                                                                    |  |                              |          |   |      |   |          |  
|----------------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                    |  | Three Months Ended March 31, |         
|                                                                                    |  | 2007                         |          |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                               |  |                              |          |   |      |   |          |  
|Net income                                                                          |  | $                            | 11,923   |   |      | $ | 10,032   |  
|Adjustments to reconcile net income to net cash provided by operating activities:   |  |                              |          |   |      |   |          |  
|Amortization and accretion of premiums and discounts on securities, net             |  |                              | 597      |   |      |   | 625      |  
|Net (gain) loss on trading assets                                                   |  |                              | (1       | ) |      |   | 135      |  
|Net gain on the sale of loans                                                       |  |                              | (504     | ) |      |   | (305     | )
|Provision for credit losses                                                         |  |                              | 370      |   |      |   | 1,326    |  
|Writedowns, less gains on sale, of real estate acquired by foreclosure              |  |                              | (101     | ) |      |   | (29      | )
|Depreciation and amortization                                                       |  |                              | 2,107    |   |      |   | 2,090    |  
|Proceeds from principal paydowns of trading securities                              |  |                              |         |   |      |   | 148      |  
|Proceeds from the sale of trading securities                                        |  |                              | 792      |   |      |   | 11,890   |  
|Purchases of trading securities                                                     |  |                              | (876     | ) |      |   | (274     | )
|Stock-based compensation expense (net of tax benefit recognized)                    |  |                              | 374      |   |      |   | 431      |  
|Excess tax benefits from share-based payment arrangements                           |  |                              | (137     | ) |      |   | (386     | )
|Net decrease in loans held for sale                                                 |  |                              | 610      |   |      |   | 1,687    |  
|Net gain on sale of bank assets                                                     |  |                              | (177     | ) |      |   | (11      | )
|Net decrease (increase) in accrued interest receivable and other assets             |  |                              | 7,639    |   |      |   | (518     | )
|Net increase in accrued interest payable and other liabilities                      |  |                              | 1,606    |   |      |   | 3,468    |  
|                                                                                    |  |                              |          |   |      |   |          |  
|Net cash provided by operating activities                                           |  |                              | 24,222   |   |      |   | 30,309   |  
|                                                                                    |  |                             
|CASH FLOWS FROM INVESTING ACTIVITIES:                                               |  |                              |          |   |      |   |          |  
|Proceeds from the maturities or calls and paydowns of held-to-maturity securities   |  |                              | 4,435    |   |      |   | 4,341    |  
|Proceeds from the maturities or calls and paydowns of available-for-sale securities |  |                              | 19,481   |   |      |   | 26,703   |  
|Purchases of available-for-sale securities                                          |  |                              | (33,176  | ) |      |   | (23,884  | )
|Purchases of held-to-maturity securities                                            |  |                              | (5,484   | ) |      |   | (5,671   | )
|Net decrease (increase) in loans held for investment                                |  |                              | 10,911   |   |      |   | (64,890  | )
|Proceeds from sale of real estate acquired by foreclosure                           |  |                              | 896      |   |      |   | 219      |  
|Proceeds from sale of land held for sale                                            |  |                              |         |   |      |   | 1,570    |  
|Purchase of Partners Bank of Texas (including transaction costs)                    |  |                              | (4,944   | ) |      |   |         |  
|Cash and cash equivalents acquired with Partners Bank of Texas                      |  |                              | 33,324   |   |      |   |         |  
|Net change in interest-bearing deposits in financial institutions                   |  |                              | 99       |   |      |   |         |  
|Proceeds from sale of loans                                                         |  |                              | 21,378   |   |      |   |         |  
|Proceeds from sale of premises and equipment                                        |  |                              | 883      |   |      |   | 61       |  
|Purchase of premises and equipment                                                  |  |                              | (1,317   | ) |      |   | (640     | )
|                                                                                    |  |                              |          |   |      |   |          |  
|Net cash provided by (used in) investing activities                                 |  |                              | 46,486   |   |      |   | (62,191  | )
|                                                                                    |  |                             
|CASH FLOWS FROM FINANCING ACTIVITIES:                                               |  |                              |          |   |      |   |          |  
|Net increase in deposit accounts                                                    |  |                              | 155,327  |   |      |   | 121,837  |  
|Net decrease in short-term borrowings                                               |  |                              | (192,950 | ) |      |   | (111,975 | )
|Issuance of trust preferred securities                                              |  |                              | 25,775   |   |      |   |         |  
|Proceeds from issuance of common stock                                              |  |                              | 1,410    |   |      |   | 2,651    |  
|Repurchase of common stock                                                          |  |                              | (2,248   | ) |      |   | (1,991   | )
|Excess tax benefits from share-based payment arrangements                           |  |                              | 137      |   |      |   | 386      |  
|Dividends paid                                                                      |  |                              | (3,727   | ) |      |   | (3,167   | )
|                                                                                    |  |                              |          |   |      |   |          |  
|Net cash (used in) provided by financing activities                                 |  |                              | (16,276  | ) |      |   | 7,741    |  
|                                                                                    |  |                              |          |   |      |   |          |  
|                                                                                    |  |                             
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                |  |                              | 54,432   |   |      |   | (24,141  | )
|CASH AND CASH EQUIVALENTS:                                                          |  |                              |          |   |      |   |          |  
|Beginning of period                                                                 |  |                              | 134,775  |   |      |   | 147,154  |  
|                                                                                    |  |                              |          |   |      |   |          |  
|End of period                                                                       |  | $                            | 189,207  |   |      | $ | 123,013  |  
|                                                                                    |  |                              |          |   |      |   |          |  
|Supplemental information:                                                           |  |                              |          |   |      |   |          |  
|Income taxes paid                                                                   |  | $                            |         |   |      | $ | 1,000    |  
|Interest paid                                                                       |  |                              | 22,296   |   |      |   | 16,718   |  
|Noncash investing and financing activities                                         |  |                              |          |   |      |   |          |  
|Acquisition of real estate through foreclosure of collateral                        |  |                              | 1,954    |   |      |   | 2,457    |  
|Acquisition of Partners Bank of Texas                                               |  |                              |          |   |      |   |          |  
|Common Stock issued                                                                 |  |                              | 26,521   |   |      |   |         |  
|Payable to Partners Bank of Texas shareholders                                      |  |                              | 20,537   |   |      |   |         |  

See Notes to Consolidated Financial Statements

5



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##### Table of Contents

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



|1. | ACCOUNTING POLICIES
|-- | -------------------

Basis of Presentation

The consolidated Financial Statements are unaudited and include the accounts of Sterling Bancshares, Inc. 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 2006 Annual Report on Form 10-K.

Recent Accounting Standards

In June 2006, the Financial Accounting Standards Board (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 (SFAS 109) Accounting for Income Taxes. FIN 48 clarifies the application of SFAS 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. The Company adopted FIN 48 on January 1, 2007. The adoption of this accounting standard did not have a material impact on the Companys financial statements.

In September 2006, the FASB issued Statement of Accounting Standards No. 157 (SFAS 157) Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those
fiscal years. Management has not completed its evaluation of the impact of this standard; however, the Company does not expect it to be material to its financial statements.

In February 2007, the FASB issued Statement of Accounting Standards No. 159 (SFAS 159) The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose
to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets
and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
Management has not completed its evaluation of the impact of this standard; however, the Company does not expect it to be material to its financial statements.



|2. | ACQUISITIONS
|-- | ------------

On March 30, 2007, the Company acquired Partners
Bank of Texas (Partners Bank). Partners Bank was a privately held bank which operated four banking offices in the Houston area. The completion of the acquisition of Partners Bank has enabled the Company to fill out its footprint in Northeast
Houston. As of March 30, 2007, Partners Bank had assets of approximately $191 million, loans of $142 million and deposits of $166 million. The purchase price of $52.3 million consisted of $25.5 million of the Companys common stock (2.3
million shares), cash totaling $26.5 million and $264 thousand in acquisition-related costs for all of Partners Banks issued and outstanding shares of common stock. The shares of the Companys common stock issued in the transaction were
valued at the average of the closing price of the Companys common stock for the ten trading days immediately before the fifth trading day before March 30, 2007. This acquisition was accounted for using the purchase method of accounting in
which the excess of the purchase price over the estimated fair value of the net assets was recorded as goodwill, none of which is expected to be deductible for tax purposes.



6



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##### Table of Contents

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of
acquisition. The purchase price allocation is preliminary and is subject to final determination (in thousands).



|                                               |  |           |          |  
|---------------------------------------------- |  | --------- | -------- | -
|                                               |  | March 31, |         
|                                               |  | 2007      |         
|Cash and cash equivalents                      |  | $         | 33,324   |  
|Available-for-sale securities                  |  |           | 10,947   |  
|Total loans                                    |  |           | 141,750  |  
|Allowance for loan losses                      |  |           | (1,496   | )
|Premises and equipment                         |  |           | 3,387    |  
|Accrued interest receivable                    |  |           | 935      |  
|Core deposit intangibles                       |  |           | 4,087    |  
|Goodwill                                       |  |           | 29,094   |  
|Other assets                                   |  |           | 1,577    |  
|                                               |  |           |          |  
|Total assets acquired                          |  |           | 223,605  |  
|                                               | 
|Deposits                                       |  |           | (165,766 | )
|Short-term borrowings                          |  |           | (4,714   | )
|Accrued interest payable and other liabilities |  |           | (860     | )
|                                               |  |           |          |  
|Total liabilities assumed                      |  |           | (171,340 | )
|                                               | 
|Net assets acquired                            |  | $         | 52,265   |  
|                                               |  |           |          |  

Core deposit intangibles (CDI) are amortized using an economic life method based on deposit attrition.
As a result, amortization will decline over time with most of the amortization occurring during the initial years. The weighted average amortization period for core deposit intangibles related to the Partners Bank acquisition is approximately 6
years. Additional information related to intangible assets and goodwill is included in Note 6  Goodwill and Other Intangibles.

On September 29,
2006, the Company acquired Kerrville, Texas-based BOTH, Inc., and its subsidiary bank, Bank of the Hills (BOTH). BOTH operated five banking offices in the San Antonio/Kerrville area. The purchase price of $73.0 million consisted of $41.0
million of the Companys common stock (3.0 million shares), $31.5 million in cash and $536 thousand in acquisition-related costs. The shares of the Companys common stock issued in the transaction were valued at the average of the closing
price of the Companys common stock for the ten business days ending on August 22, 2006. This acquisition was accounted for using the purchase method of accounting in which the excess of the purchase price over the estimated fair value of
the net assets was recorded as goodwill, none of which is expected to be deductible for tax purposes.



7



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|3. | SECURITIES
|-- | ----------

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



|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|------------------------------------------------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                                    |  | March 31, 2007   
|                                                                    |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                  |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                 | 17,446  |                      | $ |                      |  | $ | (53        | ) |  | $ | 17,393 
|Obligations of states of the U.S. and political subdivisions        |  |                   | 1,895   |                      |   | 15                    |  |   | (2         | ) |  |   | 1,908  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 409,646 |                      |   | 186                   |  |   | (8,070     | ) |  |   | 401,762
|Other securities                                                    |  |                   | 14,679  |                      |   |                      |  |   | (487       | ) |  |   | 14,192 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 443,666 |                      | $ | 201                   |  | $ | (8,612     | ) |  | $ | 435,255
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                 | 89,786  |                      | $ | 480                   |  | $ | (350       | ) |  | $ | 89,916 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 75,491  |                      |   | 121                   |  |   | (887       | ) |  |   | 74,725 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 165,277 |                      | $ | 601                   |  | $ | (1,237     | ) |  | $ | 164,641
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|                                                                    | 
|                                                                    |  | December 31, 2006
|                                                                    |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                  |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                 | 6,501   |                      | $ |                      |  | $ | (76        | ) |  | $ | 6,425  
|Obligations of states of the U.S. and political subdivisions        |  |                   | 2,306   |                      |   | 17                    |  |   | (2         | ) |  |   | 2,321  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 395,614 |                      |   | 56                    |  |   | (9,855     | ) |  |   | 385,815
|Other securities                                                    |  |                   | 15,165  |                      |   |                      |  |   | (375       | ) |  |   | 14,790 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 419,586 |                      | $ | 73                    |  | $ | (10,308    | ) |  | $ | 409,351
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                 | 91,946  |                      | $ | 495                   |  | $ | (380       | ) |  | $ | 92,061 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 72,317  |                      |   | 91                    |  |   | (934       | ) |  |   | 71,474 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 164,263 |                      | $ | 586                   |  | $ | (1,314     | ) |  | $ | 163,535
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        



8



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The contractual maturities of securities at March 31, 2007 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                                            |  | $                  | 12,716  |                  | $ | 12,665        |  | $          | 6,826   |  | $ | 6,854  
|Due after one year through five years                              |  |                    | 6,305   |                  |   | 6,316         |  |            | 39,659  |  |   | 39,655 
|Due after five years through ten years                             |  |                    | 320     |                  |   | 320           |  |            | 43,301  |  |   | 43,407 
|Mortgage-backed securities and collateralized mortgage obligations |  |                    | 409,646 |                  |   | 401,762       |  |            | 75,491  |  |   | 74,725 
|Other securities                                                   |  |                    | 14,679  |                  |   | 14,192        |  |            |        |  |   |       
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|Total                                                              |  | $                  | 443,666 |                  | $ | 435,255       |  | $          | 165,277 |  | $ | 164,641
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        

There were no securities sold during the three months ended March 31, 2007 and 2006.

Securities with unrealized losses segregated by length of impairment as of March 31, 2007 were as follows (in thousands):



|                                                                   |  |                     |        |                       |   |      |            |  |               |        |                       |   |         |            |   |        |   |  |   |        
|------------------------------------------------------------------ |  | ------------------- | ------ | --------------------- | - | ---- | ---------- |  | ------------- | ------ | --------------------- | - | ------- | ---------- | - | ------ | - |  | - | -------
|                                                                   |  | 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                                           |  | $                   |       |                       | $ |     |            |  | $             |       |                       | $ | 17,445  |            | $ | (53    | ) |  | $ | 17,392 
|Obligations of states of the U.S. and political subdivisions       |  |                     |       |                       |   |     |            |  |               |       |                       |   | 473     |            |   | (2     | ) |  |   | 471    
|Mortgage-backed securities and collateralized mortgage obligations |  |                     | 46,646 |                       |   | (364 | )          |  |               | 46,282 |                       |   | 315,675 |            |   | (7,706 | ) |  |   | 307,969
|Other securities                                                   |  |                     |       |                       |   |     |            |  |               |       |                       |   | 14,681  |            |   | (487   | ) |  |   | 14,194 
|                                                                   |  |                     |        |                       |   |      |            |  |               |        |                       |   |         |            |   |        |   |  |   |        
|Total                                                              |  | $                   | 46,646 |                       | $ | (364 | )          |  | $             | 46,282 |                       | $ | 348,274 |            | $ | (8,248 | ) |  | $ | 340,026
|                                                                   |  |                     |        |                       |   |      |            |  |               |        |                       |   |         |            |   |        |   |  |   |        
|Held-to-Maturity                                                   |  |                     |        |                       |   |      |            |  |               |        |                       |   |         |            |   |        |   |  |   |        
|Obligations of states of the U.S. and political subdivisions       |  | $                   | 8,715  |                       | $ | (6   | )          |  | $             | 8,709  |                       | $ | 19,992  |            | $ | (344   | ) |  | $ | 19,648 
|Mortgage-backed securities and collateralized mortgage obligations |  |                     | 15,959 |                       |   | (80  | )          |  |               | 15,879 |                       |   | 42,308  |            |   | (807   | ) |  |   | 41,501 
|                                                                   |  |                     |        |                       |   |      |            |  |               |        |                       |   |         |            |   |        |   |  |   |        
|Total                                                              |  | $                   | 24,674 |                       | $ | (86  | )          |  | $             | 24,588 |                       | $ | 62,300  |            | $ | (1,151 | ) |  | $ | 61,149 
|                                                                   |  |                     |        |                       |   |      |            |  |               |        |                       |   |         |            |   |        |   |  |   |        

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 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 2.0% of the amortized cost basis at March 31, 2007. During the fourth quarter of 2006, realized losses of $562 thousand were recorded on certain interest-only securities. These
securities are tied to underlying government guaranteed loans and are subject to prepayment and interest rate fluctuations. These securities had been in an unrealized loss position since the fourth quarter of 2005. Given the current prepayment
factors for the underlying loans and managements inability to determine when a full recovery of the value may occur, management considered these securities to be other than temporarily impaired at December 31, 2006. 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 March 31, 2007. Management believes that the unrealized losses on the Companys securities portfolio
were caused primarily by interest rate increases. Because the decline in



9



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##### Table of Contents

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 March 31, 2007.

The Company does not own any securities of any one issuer (other than the U.S. government and its agencies) for which the aggregate adjusted cost exceeds 10% of the consolidated shareholders equity at
March 31, 2007.

Securities with carrying values totaling $434 million and fair values totaling $427 million were pledged to secure public deposits at
March 31, 2007.



|4. | LOANS
|-- | -----

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



|                                |  |           |           |   |              |   |        |   |           |  |       |  
|------------------------------- |  | --------- | --------- | - | ------------ | - | ------ | - | --------- |  | ----- | -
|                                |  | March 31, |           |   | December 31, |  
|                                |  | 2007      |           |   | 2006         |  
|                                |  | Amount    |           | % |              |   | Amount |   | %         | 
|Loans held for sale             |  | $         | 52,962    |   | 1.6          | % |        | $ | 54,722    |  | 1.7   | %
|Loans held for investment       |  |           |           |   |              |   |        |   |           |  |       |  
|Domestic                        |  |           |           |   |              |   |        |   |           |  |       |  
|Commercial and industrial       |  |           | 838,764   |   | 25.9         | % |        |   | 824,494   |  | 26.3  | %
|Real estate:                    |  |           |           |   |              |   |        |   |           |  |       |  
|Commercial                      |  |           | 1,358,354 |   | 41.9         | % |        |   | 1,336,465 |  | 42.7  | %
|Construction                    |  |           | 666,135   |   | 20.6         | % |        |   | 597,985   |  | 19.1  | %
|Residential mortgage            |  |           | 215,476   |   | 6.7          | % |        |   | 209,163   |  | 6.7   | %
|Consumer/other                  |  |           | 81,577    |   | 2.5          | % |        |   | 79,642    |  | 2.5   | %
|Foreign                         |  |           |           |   |              |   |        |   |           |  |       |  
|Commercial and industrial       |  |           | 23,752    |   | 0.7          | % |        |   | 27,479    |  | 0.9   | %
|Other loans                     |  |           | 2,543     |   | 0.1          | % |        |   | 2,617     |  | 0.1   | %
|                                |  |           |           |   |              |   |        |   |           |  |       |  
|Total loans held for investment |  |           | 3,186,601 |   | 98.4         | % |        |   | 3,077,845 |  | 98.3  | %
|                                |  |           |           |   |              |   |        |   |           |  |       |  
|Total loans                     |  | $         | 3,239,563 |   | 100.0        | % |        | $ | 3,132,567 |  | 100.0 | %
|                                |  |           |           |   |              |   |        |   |           |  |       |  

Loan maturities and rate sensitivity of the loans held for investment excluding residential mortgage and consumer
loans, at March 31, 2007 were as follows (in thousands):



|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|----------------------------------- |  | ---------------------- | --------- | ---------------------------------- | - | ------------------- |  | ----- | ------- |  | - | ---------
|                                    |  | Due in OneYear or Less |           | Due AfterOne YearThrough FiveYears |   | Due AfterFive Years |  | Total
|Commercial and industrial           |  | $                      | 636,113   |                                    | $ | 181,009             |  | $     | 21,642  |  | $ | 838,764  
|Real estatecommercial              |  |                        | 553,625   |                                    |   | 615,994             |  |       | 188,735 |  |   | 1,358,354
|Real estateconstruction            |  |                        | 481,861   |                                    |   | 141,357             |  |       | 42,917  |  |   | 666,135  
|Foreign loans                       |  |                        | 24,245    |                                    |   | 2,050               |  |       |        |  |   | 26,295   
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|Total                               |  | $                      | 1,695,844 |                                    | $ | 940,410             |  | $     | 253,294 |  | $ | 2,889,548
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|                                    |  |                        |           |                                   
|Loans with a fixed interest rate    |  | $                      | 237,479   |                                    | $ | 787,714             |  | $     | 229,123 |  | $ | 1,254,316
|Loans with a floating interest rate |  |                        | 1,458,365 |                                    |   | 152,696             |  |       | 24,171  |  |   | 1,635,232
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|Total                               |  | $                      | 1,695,844 |                                    | $ | 940,410             |  | $     | 253,294 |  | $ | 2,889,548
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          



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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 March 31, 2007, 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.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported in the balance sheet as loans held for investment
stated at the principal amount outstanding adjusted for charge-offs, the allowance for loan losses, deferred fees or costs and unamortized premiums or discounts. Loans are classified as held for sale when management has positively determined that
the loans will be sold in the foreseeable future and the Company has the ability to do so. The classification may be made upon origination or subsequent to the origination or purchase. Once a decision has been made to sell loans not previously
classified as held for sale, such loans are transferred into the held for sale classification and carried at the lower of cost or fair value. During the first quarter of 2007, the Company sold $21.0 million of performing commercial real estate loans
that were originally acquired as held for investment resulting in net gains of $362 thousand. These loans were sold as part of the Companys ongoing management of the size, concentrations and risk profile of the loan portfolio.

In the ordinary course of business, the Company has granted loans to certain directors, officers and their affiliates. 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.

An analysis of activity with respect to these related-party loans is as follows (in thousands):



|                                         |  |           |       |   |              |   |        |  
|---------------------------------------- |  | --------- | ----- | - | ------------ | - | ------ | -
|                                         |  | March 31, |       |   | December 31, |  
|                                         |  | 2007      |       |   | 2006         |  
|Beginning balance                        |  | $         | 2,293 |   |              | $ | 9,021  |  
|New loans                                |  |           |      |   |              |   |       |  
|Loans to insiders/directors who resigned |  |           |      |   |              |   | (2,606 | )
|Repayments                               |  |           | (392  | ) |              |   | (4,122 | )
|                                         |  |           |       |   |              |   |        |  
|Ending balance                           |  | $         | 1,901 |   |              | $ | 2,293  |  
|                                         |  |           |       |   |              |   |        |  

The recorded investment in impaired loans was $13.0 million and $11.4 million at March 31, 2007 and
December 31, 2006, respectively. Such impaired loans required an allowance for loan losses of $1.7 million and $1.8 million, respectively. The average recorded investment in impaired loans for the three months ended March 31, 2007 and 2006
was $12.7 million and $23.2 million, respectively. No interest on impaired loans was received during the three months ended March 31, 2007 and 2006.

Included in impaired loans are nonperforming loans of $13.0 million and $11.4 million at March 31, 2007 and December 31, 2006, respectively, which have been categorized by management as nonaccrual loans. Interest foregone on
nonaccrual loans for the three months ended March 31, 2007 and 2006 was approximately $923 thousand and $760 thousand, respectively. The Company had one restructured loan totaling $777 thousand as of March 31, 2007 and December 31,
2006.

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 $4.6 million and $2.7 million at March 31, 2007 and December 31, 2006, respectively. These loans consisted primarily
of government guaranteed loans.



11



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##### Table of Contents

|5. | ALLOWANCE FOR CREDIT LOSSES
|-- | ---------------------------

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



|                                                                |  |                             |        |   |      |   |        |  
|--------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                |  | Three Months EndedMarch 31, |       
|                                                                |  | 2007                        |        |   | 2006 |  
|Allowance for Credit Losses                                     |  |                             |        |   |      |   |        |  
|Allowance for loan losses at beginning of period                |  | $                           | 32,027 |   |      | $ | 31,230 |  
|Loans charged-off                                               |  |                             | 980    |   |      |   | 2,146  |  
|Loan recoveries                                                 |  |                             | (574   | ) |      |   | (508   | )
|                                                                |  |                             |        |   |      |   |        |  
|Net loans charged-off                                           |  |                             | 406    |   |      |   | 1,638  |  
|Allowance for loan losses associated with acquired institutions |  |                             | 1,496  |   |      |   |       |  
|Provision for loan losses                                       |  |                             | 370    |   |      |   | 1,524  |  
|                                                                |  |                             |        |   |      |   |        |  
|Allowance for loan losses at end of period                      |  |                             | 33,487 |   |      |   | 31,116 |  
|                                                                |  |                             |        |   |      |   |        |  
|Reserve for unfunded loan commitments at beginning of period    |  |                             | 927    |   |      |   | 1,173  |  
|Provision for losses on unfunded loan commitments               |  |                             |       |   |      |   | (198   | )
|                                                                |  |                             |        |   |      |   |        |  
|Reserve for unfunded loan commitments at end of period          |  |                             | 927    |   |      |   | 975    |  
|                                                                |  |                             |        |   |      |   |        |  
|Total allowance for credit losses                               |  | $                           | 34,414 |   |      | $ | 32,091 |  
|                                                                |  |                             |        |   |      |   |        |  



|6. | GOODWILL AND OTHER INTANGIBLES
|-- | ------------------------------

The changes in the carrying amount
of goodwill by reporting unit for the year ended December 31, 2006, and the period ended March 31, 2007, are as follows (in thousands):



|                                |  |         |        |             |   |        |  |       |        |  |   |        
|------------------------------- |  | ------- | ------ | ----------- | - | ------ |  | ----- | ------ |  | - | -------
|                                |  | Houston |        | San Antonio |   | Dallas |  | Total
|Balance, January 1, 2006        |  | $       | 29,613 |             | $ | 27,205 |  | $     | 28,208 |  | $ | 85,026 
|BOTH, Inc. acquisition          |  |         |       |             |   | 45,832 |  |       |       |  |   | 45,838 
|                                |  |         |        |             |   |        |  |       |        |  |   |        
|Balance, December 31, 2006      |  |         | 29,613 |             |   | 73,037 |  |       | 28,208 |  |   | 130,858
|BOTH, Inc. goodwill adjustments |  |         |       |             |   | 6      |  |       |       |  |   | 6      
|Partners Bank acquisition       |  |         | 29,094 |             |   |       |  |       |       |  |   | 29,094 
|                                |  |         |        |             |   |        |  |       |        |  |   |        
|Balance, March 31, 2007         |  | $       | 58,707 |             | $ | 73,043 |  | $     | 28,208 |  | $ | 159,958
|                                |  |         |        |             |   |        |  |       |        |  |   |        

The changes in the carrying amounts of core deposit intangibles for the year ended December 31, 2006, and the
period ended March 31, 2007, are as follows (in thousands):



|                           |  |   |        |  
|-------------------------- |  | - | ------ | -
|Balance, January 1, 2006   |  | $ | 3,551  |  
|Amortization expense       |  |   | (1,012 | )
|BOTH, Inc. acquisition     |  |   | 7,760  |  
|                           |  |   |        |  
|Balance, December 31, 2006 |  |   | 10,299 |  
|Amortization expense       |  |   | (420   | )
|Partners Bank acquisition  |  |   | 4,087  |  
|                           |  |   |        |  
|Balance, March 31, 2007    |  | $ | 13,966 |  
|                           |  |   |        |  



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|7. | JUNIOR SUBORDINATED DEBT/COMPANY MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
|-- | ----------------------------------------------------------------------------------

As of March 31, 2007, the Company had the following issues of trust preferred securities outstanding and junior subordinated debt owed to trusts (dollars in thousands):



|                     |  |                    |  |                                        |        |               |                        |                                         |   |                     |  |                   
|-------------------- |  | ------------------ |  | -------------------------------------- | ------ | ------------- | ---------------------- | --------------------------------------- | - | ------------------- |  | ------------------
|Description          |  | Issuance Date      |  | Trust Preferred Securities
Outstanding |        | Interest Rate |                        | Junior Subordinated Debt Owed To Trusts |   | 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
|                     |  |                    |  |                                        |       
|BOTH Capital Trust I |  | June 30, 2003      |  |                                        | 4,000  |               | 3-monthLIBOR plus3.10% |                                         |   | 4,123               |  | July 7, 2033      
|                     |  |                    |  |                                        |       
|Capital Trust IV     |  | March 26, 2007     |  |                                        | 25,000 |               | 3-monthLIBOR plus1.60% |                                         |   | 25,775              |  | June 15, 2037     
|                     |  |                    |  |                                        |        |               |                        |                                         |   |                     |  |                   
|Total                |  |                    |  | $                                      | 80,250 |               |                        |                                         | $ | 82,734              |  |                   
|                     |  |                    |  |                                        |        |               |                        |                                         |   |                     |  |                   

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 for Statutory Trust One, Capital Trust III and Capital Trust IV and BOTH, Inc. for BOTH Capital Trust I, 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 payments 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.

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 March 31, 2007, the floating rate was 8.80% on these
securities compared to 8.81% at December 31, 2006.

The BOTH Capital Trust I preferred securities bear interest at a floating rate equal to the
three-month LIBOR, plus 3.10%; however, the calculated interest rate will not exceed 5.96% in the period to July 7, 2008. As of March 31, 2007, the rate on these securities was 5.96%.

On March 26, 2007, the Company completed the issuance and sale in a private placement of $25 million in aggregate principal amount of trust preferred securities
issued by the Companys newly formed subsidiary, Sterling Bancshares Capital Trust IV, a Delaware statutory trust (Trust IV). The trust preferred securities may be called at par by the Company at any time after June 15, 2012
and require quarterly distributions of interest by Trust IV to the holder of the trust preferred securities. Distributions will be payable quarterly at an annual rate equal to 6.95% beginning on (and including) the date of original issuance and
ending on (but excluding) June 15, 2007 and then will be payable at a floating interest rate equal to the 3-month LIBOR plus 1.60% per annum, payable quarterly. Trust IV simultaneously issued 775 shares of its common securities to the
Company for the purchase price of $775 thousand, which constitutes all of the issued and outstanding common securities of Trust IV. As of March 31, 2007, the rate was 6.95% on these securities.



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##### Table of Contents

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.



|8. | DERIVATIVE FINANCIAL INSTRUMENTS
|-- | --------------------------------

The Companys interest rate
risk management strategy includes hedging the repricing characteristics of certain assets and liabilities so as to mitigate adverse effects on the Companys net interest margin and cash flows from changes in interest rates. The Company uses
certain derivative instruments to add stability to the Companys net interest income and to manage the Companys exposure to interest rate movements.

The Company may designate a derivative as either an accounting hedge of the fair value of a recognized fixed rate asset or an unrecognized firm commitment (fair value hedge) or an accounting hedge of a forecasted transaction or
of the variability of future cash flows of a floating rate asset or liability (cash flow hedge). All derivatives are recorded as other assets or other liabilities on the balance sheet at their respective fair values. To the extent of the
effectiveness of a hedge, changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge is recorded in other comprehensive income, net of income taxes. For all hedge relationships, ineffectiveness resulting from
differences between the changes in fair value or cash flows of the hedged item and changes in fair value of the derivative are recognized as other income in the results of operations.

The Company estimates its interest rate derivatives using a standardized methodology that nets the discounted expected future cash receipts and cash payments (based on observable market inputs). These future net cash
flows, however, are susceptible to change due primarily to fluctuations in interest rates. As a result, the estimated values of these derivatives will typically change over time as cash is received and paid and also as market conditions change. As
these changes take place, they may have a positive or negative impact on our estimated valuations.

In June 2003, the Bank entered into an interest rate
swap agreement with a notional amount of $50.0 million in which the Bank swapped the fixed rate to a floating rate. Under the terms of the swap agreement, the Bank receives a fixed coupon rate of 7.375% and pays a variable interest rate equal to the
three-month LIBOR that is reset on a quarterly basis, plus 3.62%. This swap is designated as a fair value hedge of the Companys $50.0 million subordinated debentures and qualifies for the short-cut method of accounting. These
subordinated notes bear interest at a fixed rate of 7.375% and mature on April 15, 2013. Interest payments are due semi-annually. The subordinated notes may not be redeemed or called prior to their maturity. The swaps fair value is
included in other liabilities and was $3.5 million and $3.8 million with a floating rate of 8.98% and 9.00% on March 31, 2007 and December 31, 2006, respectively. 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.

During 2006, the Company purchased a prime interest rate
floor with a notional amount of $113 million and a strike rate of 8.00% and a prime interest rate collar contract with a notional amount of $250 million and an 8.42% interest rate cap and an 8.00% interest rate floor. These contracts are designated
as cash flow hedges of the monthly interest receipts from a portion of the Companys portfolio of prime-based variable rate loans. The interest rate floor and interest rate collar have termination dates of August 1, 2009 and August 1,
2010, respectively.



14



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##### Table of Contents

For cash flow hedges, the effective portion of the gain or loss on the derivative hedging instrument is reported in other
comprehensive income, while the ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge
transaction) is recorded in current earnings as other income or other expense. The accumulated net after-tax gain on the floor and collar contracts included in accumulated other comprehensive income totaled $2.2 million at March 31, 2007. The
total fair value of the interest-rate collar and floor was $4.3 million at March 31, 2007 and is included in other assets.



|9. | INCOME TAXES
|-- | ------------

We adopted the provisions of FASB Interpretation
No. 48 (FIN 48) Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109, on January 1, 2007. There was no effect on our consolidated balance sheet or income statement as a
result of implementing FIN 48. As of March 31, 2007 and January 1, 2007, the Company had unrecognized tax benefits of $812 thousand which would favorably impact the annual effective tax rate upon recognition. These unrecognized tax benefits result
from open state tax examination periods which could expire and result in these tax benefits being recognized in the next 12 months.

We file income tax
returns in the U.S. federal jurisdiction and various state jurisdictions. During 2006, the Internal Revenue Service completed an examination of the Companys 2003 tax year. We are no longer subject to U.S. federal tax examinations for years
before 2004. State jurisdictions remain subject to examination beginning with the 2003 tax year.

The effective tax rate for the first quarter of 2007 was
approximately 35% as compared to 33% for the same period in 2006. The tax rate for 2007 is a result of the anticipated impact of the new Texas margin tax. The Companys effective tax rate for the remainder of 2007 is subject to the final
resolution of the margin tax from the Texas legislature.

Our policy is that we recognize interest and penalties as a component of income tax expense. As
of March 31, 2007 and the date of adoption of FIN 48, we had accrued interest and penalties of $95 thousand. No interest expense was recognized in the income statement during the first quarter of 2007.



|10. | 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. There have been no
significant changes in the Companys stock plans since December 31, 2006.

Total stock-based compensation expense of $519 thousand and $606
thousand was charged against income for the three month periods ended March 31, 2007 and March 31, 2006, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $145
thousand and $175 thousand for the three months ended March 31, 2007 and 2006, respectively.

On January 1, 2006, the Company entered into an
employment agreement with its chief executive officer (Executive) in which the Executive was awarded 187,500 Performance Restricted Share Units (PRSU) and can earn up to 187,500 bonus shares subject to performance measures.
These performance measures include annual growth in earnings per share, average return on equity and an overall board evaluation over a four year period. Based on these criteria, the Executive will earn a specific number of the eligible share units.
As of March 31, 2007, there was $894 thousand of total unrecognized compensation expense related to the PRSUs and bonus shares which will be recognized over a remaining period of 2.75 years. If the 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 2.3 million shares of Company common stock may be issued under this plan subject to adjustment upon changes in
capitalization. During the three months ended March 31, 2007 and 2006, 10,698 shares and 9,008 shares, respectively, were subscribed for through payroll deductions under the Purchase Plan.



15



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##### Table of Contents

|11. | EARNINGS PER COMMON SHARE
|--- | -------------------------

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



|                                        |  |                              |        |      |   |       
|--------------------------------------- |  | ---------------------------- | ------ | ---- | - | ------
|                                        |  | Three months ended March 31,
|                                        |  | 2007                         |        | 2006
|Net income                              |  | $                            | 11,923 |      | $ | 10,032
|Basic:                                  |  |                              |        |      |   |       
|Weighted average shares outstanding     |  |                              | 71,084 |      |   | 68,000
|Diluted:                                |  |                              |        |      |   |       
|Add incremental shares for:             |  |                              |        |      |   |       
|Assumed exercise of outstanding options |  |                              | 666    |      |   | 691   
|                                        |  |                              |        |      |   |       
|Total                                   |  | $                            | 71,750 |      | $ | 68,691
|                                        |  |                              |        |      |   |       
|Earnings per share:                     |  |                              |        |      |   |       
|Basic                                   |  | $                            | 0.17   |      | $ | 0.15  
|                                        |  |                              |        |      |   |       
|Diluted                                 |  | $                            | 0.17   |      | $ | 0.15  
|                                        |  |                              |        |      |   |       

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 338,424 and 128,700 options outstanding for the three months ended March 31, 2007 and 2006, respectively, that were antidilutive.



|12. | 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 $2.2 million and $1.1 million
for the three months ended March 31, 2007 and 2006, respectively. Refer to the 2006 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 10) and certain other executive officers. Under these agreements, 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.



|13. | 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.



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##### Table of Contents

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



|                             |  |           |         |              |   |        
|---------------------------- |  | --------- | ------- | ------------ | - | -------
|                             |  | March 31, |         | December 31,
|                             |  | 2007      |         | 2006        
|Commitments to extend credit |  | $         | 826,212 |              | $ | 822,209
|Standby letters of credit    |  |           | 94,759  |              |   | 83,639 

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, an interest rate floor, an interest rate collar (discussed in Note 8) and the Companys Trust
Preferred Securities (discussed in Note 7).



|14. | 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 March 31, 2007 and December 31, 2006, that Sterling Bancshares and the Bank met all capital adequacy requirements to which they are subject. 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.



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##### Table of Contents

The Companys consolidated and the Banks capital ratios are presented in the following table:



|                                         |  |                                           |         |       |                   |   |             |                   |         |                   |     |                        |  |       |         |  |      |  
|---------------------------------------- |  | ----------------------------------------- | ------- | ----- | ----------------- | - | ----------- | ----------------- | ------- | ----------------- | --- | ---------------------- |  | ----- | ------- |  | ---- | -
|                                         |  |                                           |         |       |                   |   |             |                   |         |                   |     | To Be Categorized as   | 
|                                         |  |                                           |         |       |                   |   |             |                   |         |                   |     | Well Capitalized Under | 
|                                         |  |                                           |         |       |                   |   | For Capital |                   |         | Prompt Corrective |    
|                                         |  | Actual                                    |         |       | Adequacy Purposes |   |             | Action Provisions |        
|                                         |  | Amount                                    |         | Ratio |                   |   | Amount      |                   | Ratio   |                   |     | Amount                 |  | Ratio |        
|                                         |  | (In thousands, except percentage amounts) |        
|CONSOLIDATED:                            |  |                                           |         |       |                   |   |             |                   |         |                   |     |                        |  |       |         |  |      |  
|As of March 31, 2007:                    |  |                                           |         |       |                   |   |             |                   |         |                   |     |                        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 435,651 |       | 11.2              | % |             | $                 | 311,712 |                   | 8.0 | %                      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 354,772 |       | 9.1               | % |             |                   | 155,856 |                   | 4.0 | %                      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 354,772 |       | 9.0               | % |             |                   | 157,382 |                   | 4.0 | %                      |  |       | N/A     |  | N/A  |  
|                                         |  |                                           |         |       |                   |  
|As of December 31, 2006:                 |  |                                           |         |       |                   |   |             |                   |         |                   |     |                        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 407,079 |       | 10.7              | % |             | $                 | 303,871 |                   | 8.0 | %                      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 327,991 |       | 8.6               | % |             |                   | 151,936 |                   | 4.0 | %                      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 327,991 |       | 8.1               | % |             |                   | 161,111 |                   | 4.0 | %                      |  |       | N/A     |  | N/A  |  
|                                         |  |                                           |         |       |                   |  
|STERLING BANK:                           |  |                                           |         |       |                   |   |             |                   |         |                   |     |                        |  |       |         |  |      |  
|As of March 31, 2007:                    |  |                                           |         |       |                   |   |             |                   |         |                   |     |                        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 432,878 |       | 11.1              | % |             | $                 | 311,307 |                   | 8.0 | %                      |  | $     | 389,133 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 351,998 |       | 9.0               | % |             |                   | 155,653 |                   | 4.0 | %                      |  |       | 233,480 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 351,998 |       | 9.0               | % |             |                   | 157,158 |                   | 4.0 | %                      |  |       | 196,447 |  | 5.0  | %
|                                         |  |                                           |         |       |                   |  
|As of December 31, 2006:                 |  |                                           |         |       |                   |   |             |                   |         |                   |     |                        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 401,511 |       | 10.6              | % |             | $                 | 303,449 |                   | 8.0 | %                      |  | $     | 379,312 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 322,423 |       | 8.5               | % |             |                   | 151,725 |                   | 4.0 | %                      |  |       | 227,587 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 322,423 |       | 8.0               | % |             |                   | 160,879 |                   | 4.0 | %                      |  |       | 201,099 |  | 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 March 31, 2007 the entire amount of the $80.3 million of trust preferred
securities outstanding would count as Tier 1 capital. The 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
March 31, 2007.

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 $122 million available for payment of dividends at March 31, 2007 by the Bank. At March 31, 2007, the aggregate amount of dividends, which legally could
be paid without prior approval of various regulatory agencies, totaled approximately $43.7 million by the Bank.



|15. | SUBSEQUENT EVENT
|--- | ----------------

On May 4, 2007, the Company entered into a
definitive agreement to acquire MBM Advisors, Inc. (MBM), a Houston-based investment advisory and pension administration/consulting firm with approximately $700 million in assets under management. MBM currently has locations in Houston
and Dallas, Texas. The merger is an all cash transaction of $9 million with $6 million to be paid at closing and the remaining $3 million over a four year period. Additionally, there is a $7 million potential earn-out over a four year period based
on MBMs annual performance. The merger agreement has been approved by the respective Boards of Directors of the Company and MBM, and the transaction contemplated is subject to the approval of MBMs shareholders. The merger is subject to
customary closing conditions including receipt of regulatory approval and is expected to close by the end of the second quarter of 2007.



18



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##### Table of Contents

|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 risks identified in Item 1A of this report and 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 our Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Securities and Exchange Commission.

OVERVIEW

For more than 32 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 consumers and Texas businesses through 49 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. At March 31, 2007, we had consolidated total assets of $4.3 billion, total loans of $3.2 billion, total deposits of $3.7 billion and shareholders
equity of $445 million.

We reported net income of $11.9 million for the quarter ended March 31, 2007, an 18.8% increase compared to the $10.0 million
reported for the first quarter of 2006. First quarter 2007 earnings were $0.17 per diluted share, up from $0.15 per diluted share for the same quarter of 2006.

On March 30, 2007, we completed our acquisition of Partners Bank of Texas (Partners Bank). The results of operations for this acquisition will be included in our financial results beginning in the second quarter of 2007.



19



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##### Table of Contents

Our first quarter results reflect improved expense management despite operating in an increasingly competitive market and
challenging interest rate environment. In addition, we continued to see excellent asset quality as net charge-offs decreased to $406 thousand for the first quarter of 2007 which represents only five basis points of average loans. Additionally, the
completion of the acquisition of Partners Bank enabled us to fill out our footprint in Northeast Houston, but more importantly adds some very talented relationship-bankers to the Sterling Franchise.

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
March 31, 2007.

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions
and other subjective assessments. We have identified four 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, accounting for goodwill and other intangibles, accounting
for derivatives 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 2006 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

In June 2006, the Financial Accounting Standards Board (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 (SFAS
109) Accounting for Income Taxes. FIN 48 clarifies the application of SFAS 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. The Company adopted FIN 48 on January 1, 2007. The
adoption of this accounting standard did not have a material impact on the Companys financial statements.

In September 2006, the FASB issued
Statement of Accounting Standards No. 157 (SFAS 157) Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management has not completed its evaluation of the
impact of this standard; however, the Company does not expect it to be material to its financial statements.

In February 2007, the FASB issued Statement
of Accounting Standards No. 159 (SFAS 159) The Fair Value Option for Financial Assets and Financial Liabilities. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value.
The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Management has not completed its evaluation of the impact of this standard;
however, the Company does not expect it to be material to its financial statements.



20



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##### Table of Contents

SELECTED FINANCIAL DATA



|                                                               |  |                                                            |           |   |                         |   |           |      |  |   |           |  
|-------------------------------------------------------------- |  | ---------------------------------------------------------- | --------- | - | ----------------------- | - | --------- | ---- |  | - | --------- | -
|                                                               |  | Three Months EndedMarch 31,                                |           |   | Year Ended December 31, |  
|                                                               |  | 2007                                                       |           |   | 2006                    |   |           | 2006 | 
|                                                               |  | (Dollars and shares in thousands, except pershare amounts) |          
|INCOME STATEMENT DATA:                                         |  |                                                            |           |   |                         |   |           |      |  |   |           |  
|Net interest income                                            |  | $                                                          | 44,589    |   |                         | $ | 40,692    |      |  | $ | 171,806   |  
|Provision for credit losses                                    |  |                                                            | 370       |   |                         |   | 1,326     |      |  |   | 4,058     |  
|Noninterest income                                             |  |                                                            | 7,934     |   |                         |   | 6,490     |      |  |   | 31,217    |  
|Noninterest expense                                            |  |                                                            | 33,834    |   |                         |   | 30,958    |      |  |   | 131,186   |  
|Income before income taxes                                     |  |                                                            | 18,319    |   |                         |   | 14,898    |      |  |   | 67,779    |  
|Net income                                                     |  |                                                            | 11,923    |   |                         |   | 10,032    |      |  |   | 45,840    |  
|                                                               |  |                                                            |          
|BALANCE SHEET DATA (at period-end):                            |  |                                                            |           |   |                         |   |           |      |  |   |           |  
|Total assets                                                   |  | $                                                          | 4,335,310 |   |                         | $ | 3,745,578 |      |  | $ | 4,117,559 |  
|Total loans                                                    |  |                                                            | 3,239,563 |   |                         |   | 2,758,728 |      |  |   | 3,132,567 |  
|Allowance for loan losses                                      |  |                                                            | 33,487    |   |                         |   | 31,116    |      |  |   | 32,027    |  
|Total securities                                               |  |                                                            | 600,532   |   |                         |   | 612,718   |      |  |   | 573,614   |  
|Trading assets                                                 |  |                                                            | 85        |   |                         |   | 16,615    |      |  |   |          |  
|Total deposits                                                 |  |                                                            | 3,655,704 |   |                         |   | 2,959,980 |      |  |   | 3,334,611 |  
|Short-term borrowings                                          |  |                                                            | 32,439    |   |                         |   | 280,875   |      |  |   | 220,675   |  
|Subordinated debt                                              |  |                                                            | 46,467    |   |                         |   | 45,110    |      |  |   | 46,135    |  
|Junior subordinated debt                                       |  |                                                            | 82,734    |   |                         |   | 82,475    |      |  |   | 56,959    |  
|Shareholders equity                                           |  |                                                            | 445,419   |   |                         |   | 340,281   |      |  |   | 409,285   |  
|                                                               |  |                                                            |          
|COMMON SHARE DATA:                                             |  |                                                            |           |   |                         |   |           |      |  |   |           |  
|Earnings per share (1)                                         |  |                                                            |           |   |                         |   |           |      |  |   |           |  
|Basic shares                                                   |  | $                                                          | 0.17      |   |                         | $ | 0.15      |      |  | $ | 0.67      |  
|Diluted shares                                                 |  |                                                            | 0.17      |   |                         |   | 0.15      |      |  |   | 0.66      |  
|Shares used in computing earnings per common share             |  |                                                            |           |   |                         |   |           |      |  |   |           |  
|Basic shares                                                   |  |                                                            | 71,084    |   |                         |   | 68,000    |      |  |   | 68,834    |  
|Diluted shares                                                 |  |                                                            | 71,750    |   |                         |   | 68,691    |      |  |   | 69,533    |  
|End of period common shares outstanding                        |  |                                                            | 73,401    |   |                         |   | 68,168    |      |  |   | 71,001    |  
|Book value per common share at period-end                      |  |                                                            |           |   |                         |   |           |      |  |   |           |  
|Total                                                          |  | $                                                          | 6.07      |   |                         | $ | 4.99      |      |  | $ | 5.76      |  
|Tangible                                                       |  | $                                                          | 3.70      |   |                         | $ | 3.70      |      |  | $ | 3.78      |  
|Cash dividends paid per common share                           |  | $                                                          | 0.052     |   |                         | $ | 0.047     |      |  | $ | 0.186     |  
|Common stock dividend payout ratio                             |  |                                                            | 31.26     | % |                         |   | 31.58     | %    |  |   | 27.99     | %
|                                                               |  |                                                            |          
|SELECTED PERFORMANCE RATIOS AND OTHER DATA:                    |  |                                                            |           |   |                         |   |           |      |  |   |           |  
|Return on average common equity (2)                            |  |                                                            | 11.60     | % |                         |   | 11.96     | %    |  |   | 12.66     | %
|Return on average assets (2)                                   |  |                                                            | 1.18      | % |                         |   | 1.09      | %    |  |   | 1.18      | %
|Net interest margin                                            |  |                                                            | 4.87      | % |                         |   | 4.88      | %    |  |   | 4.87      | %
|Efficiency ratio (3)                                           |  |                                                            | 62.98     | % |                         |   | 65.61     | %    |  |   | 64.42     | %
|Full-time equivalent employees                                 |  |                                                            | 1,066     |   |                         |   | 1,013     |      |  |   | 1,074     |  
|Number of banking centers                                      |  |                                                            | 49        |   |                         |   | 40        |      |  |   | 45        |  
|                                                               |  |                                                            |          
|LIQUIDITY AND CAPITAL RATIOS:                                  |  |                                                            |           |   |                         |   |           |      |  |   |           |  
|Average loans to average deposits                              |  |                                                            | 93.19     | % |                         |   | 95.93     | %    |  |   | 95.85     | %
|Period-end shareholders equity to total assets                |  |                                                            | 10.27     | % |                         |   | 9.08      | %    |  |   | 9.94      | %
|Average shareholders equity to average assets                 |  |                                                            | 10.16     | % |                         |   | 9.12      | %    |  |   | 9.33      | %
|Period-end tangible capital to total tangible assets           |  |                                                            | 6.52      | % |                         |   | 6.89      | %    |  |   | 6.74      | %
|Tier 1 capital to risk-weighted assets                         |  |                                                            | 9.11      | % |                         |   | 10.02     | %    |  |   | 8.64      | %
|Total capital to risk-weighted assets                          |  |                                                            | 11.18     | % |                         |   | 12.29     | %    |  |   | 10.72     | %
|Tier 1 leverage ratio (Tier 1 capital to average assets)       |  |                                                            | 9.02      | % |                         |   | 9.30      | %    |  |   | 8.14      | %
|                                                               |  |                                                            |          
|ASSET QUALITY RATIOS:                                          |  |                                                            |           |   |                         |   |           |      |  |   |           |  
|Period-end allowance for credit losses to period-end loans     |  |                                                            | 1.06      | % |                         |   | 1.16      | %    |  |   | 1.05      | %
|Period-end allowance for loan losses to period-end loans       |  |                                                            | 1.03      | % |                         |   | 1.13      | %    |  |   | 1.02      | %
|Period-end allowance for loan losses to nonperforming loans    |  |                                                            | 256.69    | % |                         |   | 161.90    | %    |  |   | 281.27    | %
|Nonperforming assets to period-end loans and foreclosed assets |  |                                                            | 0.49      | % |                         |   | 0.81      | %    |  |   | 0.42      | %
|Nonperforming loans to period-end loans                        |  |                                                            | 0.40      | % |                         |   | 0.70      | %    |  |   | 0.36      | %
|Nonperforming assets to period-end assets                      |  |                                                            | 0.37      | % |                         |   | 0.60      | %    |  |   | 0.32      | %
|Net charge-offs to average loans (2)                           |  |                                                            | 0.05      | % |                         |   | 0.24      | %    |  |   | 0.20      | %

---

|(1) | The calculation of diluted EPS excludes 338,424 and 128,700 options outstanding for the three months ended March 31, 2007 and 2006 and 139,025 options for the year ended
December 31, 2006, which were antidilutive.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(3) | Ratio is calculated by dividing noninterest expense less acquisition costs by net interest income plus noninterest income less net gain (loss) on sales of investment securities and
less net gain on sale/leaseback transactions.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



21



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##### Table of Contents

RESULTS OF OPERATIONS

Net IncomeNet income was $11.9 million for the quarter ended March 31, 2007, an 18.8% increase compared to the $10.0 million reported for the first quarter of 2006. Earnings were $0.17 per diluted share for the
first quarter of 2007, up from $0.15 per diluted share for the first quarter of 2006.

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.

Beginning in June 2004, the Federal Reserve increased overnight interest rates
by 425 basis points to 5.25% at June 30, 2006. Since June 2006, overnight interest rates have remained at 5.25%. Our net interest margin benefited from these gradual increases in short-term interest rates through the second quarter of 2006. 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. At March 31, 2007, the market yield on 10-year U.S.
Treasury notes was 4.65% compared with 4.86% at March 31, 2006. This has resulted in a general flattening of the interest rate yield curve. However, in the current interest rate environment, the benefit of our traditionally asset-sensitive
position has been reduced but not eliminated.

Net interest income increased $3.9 million or 9.6% to $44.6 million for the three month period ended
March 31, 2007 compared to the same time period in 2006. Our net interest margin was 4.87% and 4.88% for the three month periods ended March 31, 2007 and 2006, respectively. Overall, our net interest income was higher due, in large part,
to an increase in the loan portfolio, a decrease in the investment portfolio as a percentage of interest-earning assets and good deposit growth which enabled us to pay down more expensive short-term borrowings. 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 month period ended
March 31, 2007 increased $331 million or 9.8% over the comparable period in 2006. The average yield earned on interest-earning assets increased 47 basis points for the same time period. The increase in interest-earning assets was due primarily
to an increase in the average total loan portfolio of $378 million or 13.8% for the three months ended March 31, 2007 over the comparable period in 2006. This increase in average loans contributed to the $10.6 million increase in interest
income on loans for the three months ended March 31, 2007 over the comparable period in 2006.

On average, the securities portfolio (including trading
assets) was lower by $50.4 million or 7.9% for the three month period ended March 31, 2007 compared to the same period in 2006. 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. On average, the securities portfolio represents 15.8% of average interest-earning assets for the three month period ended March 31, 2007 down from 18.8% for the same time period in
2006. This decrease in average securities combined with a 10 basis point decrease in yield earned contributed to a decrease in interest income on securities of $697 thousand for the three month period ended March 31, 2007 compared to the same
time period in 2006.

Average interest-bearing liabilities for the three month period ended March 31, 2007 increased $243 million or 10.3% compared to
the same period in 2006. The average rate paid on interest-bearing liabilities increased 66 basis points for the same time frame. This increase in interest-bearing liabilities was primarily due to an increase in average interest-bearing deposits and
certificates of deposit of $178 million and $277 million, respectively, for the three month period ended March 31, 2007 compared to the same period in 2006. The average rate paid on all interest-bearing deposits increased 100 basis points for
the same time period due 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 $8.2 million for the three month period ended
March 31, 2007 compared to the same period in 2006.

Increases in both average noninterest-bearing and interest-bearing deposits contributed to a
decrease in average short-term borrowings for the three month period ended March 31, 2007 of $189 million or 50.0% compared to the same period in 2006. The decrease in average short-term borrowings contributed to a decrease in interest expense
of $1.7 million for the three month period ended March 31, 2007 compared to the same time period in 2006. The average rate paid on short-term borrowings increased 90 basis points for the same time period, which partially offset the benefit of
the decrease in average borrowings.

Average junior subordinated debt decreased $23.8 million for the three months ended March 31, 2007 compared to
the same period in 2006 due to the prepayment of $29.6 million of junior subordinated debentures with an interest rate of 9.20%. This prepayment resulted in a decrease in interest expense of $561 thousand and a 30 basis point decrease in rate paid
for the three month period ended March 31, 2007 compared to the three months ended March 31, 2006.



22



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##### Table of Contents

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 March 31, |          
|                                           |  | 2007                         |           |   | 2006     |  
|                                           |  | Average Balance              |           |   | Interest |   | Average Yield/Rate |  |       | Average Balance |  |   | Interest  |   | Average Yield/Rate |  
|                                           |  |                              |           |   |         
|Interest-Earning Assets:                   |  |                              |           |   |          |   |                    |  |       |                 |  |   |           |   |                    |   |        |  |      |  
|Loans held for sale (1)                    |  | $                            | 53,481    |   |          | $ | 1,005              |  | 7.62  | %               |  | $ | 7,541     |   |                    | $ | 159    |  | 8.55 | %
|Loans held for investment (1):             |  |                              |           |   |          |   |                    |  |       |                 |  |   |           |   |                    |   |        |  |      |  
|Taxable                                    |  |                              | 3,058,283 |   |          |   | 60,296             |  | 8.00  | %               |  |   | 2,727,432 |   |                    |   | 50,577 |  | 7.52 | %
|Non-taxable                                |  |                              | 3,654     |   |          |   | 49                 |  | 5.48  | %               |  |   | 2,520     |   |                    |   | 40     |  | 6.36 | %
|Securities:                                |  |                              |           |   |          |   |                    |  |       |                 |  |   |           |   |                    |   |        |  |      |  
|Taxable                                    |  |                              | 493,210   |   |          |   | 5,461              |  | 4.49  | %               |  |   | 557,302   |   |                    |   | 6,149  |  | 4.47 | %
|Non-taxable                                |  |                              | 93,153    |   |          |   | 877                |  | 3.82  | %               |  |   | 60,747    |   |                    |   | 587    |  | 3.92 | %
|Trading assets                             |  |                              | 72        |   |          |   | 1                  |  | 8.48  | %               |  |   | 18,770    |   |                    |   | 300    |  | 6.48 | %
|Federal funds sold                         |  |                              | 11,895    |   |          |   | 148                |  | 5.05  | %               |  |   | 4,040     |   |                    |   | 42     |  | 4.21 | %
|Deposits in financial institutions         |  |                              | 1,429     |   |          |   | 17                 |  | 4.74  | %               |  |   | 5,331     |   |                    |   | 58     |  | 4.38 | %
|                                           |  |                              |           |   |          |   |                    |  |       |                 |  |   |           |   |                    |   |        |  |      |  
|Total interest-earning assets              |  |                              | 3,715,177 |   |          |   | 67,854             |  | 7.41  | %               |  |   | 3,383,683 |   |                    |   | 57,912 |  | 6.94 | %
|                                           |  |                              |           |   |          |  
|Noninterest-earning assets:                |  |                              |           |   |          |   |                    |  |       |                 |  |   |           |   |                    |   |        |  |      |  
|Cash and due from banks                    |  |                              | 114,498   |   |          |   |                    |  |       |                 |  |   | 113,040   |   |                    |   |        |  |      |  
|Premises and equipment, net                |  |                              | 23,172    |   |          |   |                    |  |       |                 |  |   | 40,879    |   |                    |   |        |  |      |  
|Other assets                               |  |                              | 284,046   |   |          |   |                    |  |       |                 |  |   | 225,628   |   |                    |   |        |  |      |  
|Allowance for loan losses                  |  |                              | (32,073   | ) |          |   |                    |  |       |                 |  |   | (31,204   | ) |                    |   |        |  |      |  
|                                           |  |                              |           |   |          |   |                    |  |       |                 |  |   |           |   |                    |   |        |  |      |  
|Total noninterest-earning assets           |  |                              | 389,643   |   |          |   |                    |  |       |                 |  |   | 348,343   |   |                    |   |        |  |      |  
|                                           |  |                              |           |   |          |   |                    |  |       |                 |  |   |           |   |                    |   |        |  |      |  
|Total assets                               |  | $                            | 4,104,820 |   |          |   |                    |  |       |                 |  | $ | 3,732,026 |   |                    |   |        |  |      |  
|                                           |  |                              |           |   |          |   |                    |  |       |                 |  |   |           |   |                    |   |        |  |      |  
|                                           |  |                              |           |   |          |  
|Interest-bearing liabilities:              |  |                              |           |   |          |   |                    |  |       |                 |  |   |           |   |                    |   |        |  |      |  
|Deposits:                                  |  |                              |           |   |          |   |                    |  |       |                 |  |   |           |   |                    |   |        |  |      |  
|Demand and savings                         |  | $                            | 1,227,422 |   |          | $ | 6,039              |  | 2.00  | %               |  | $ | 1,048,948 |   |                    | $ | 3,077  |  | 1.19 | %
|Certificates and other time                |  |                              | 1,084,700 |   |          |   | 12,350             |  | 4.62  | %               |  |   | 807,477   |   |                    |   | 7,134  |  | 3.58 | %
|Short-term borrowings                      |  |                              | 188,569   |   |          |   | 2,495              |  | 5.37  | %               |  |   | 377,349   |   |                    |   | 4,162  |  | 4.47 | %
|Subordinated debt                          |  |                              | 46,125    |   |          |   | 1,150              |  | 10.11 | %               |  |   | 46,021    |   |                    |   | 1,055  |  | 9.30 | %
|Junior subordinated debt                   |  |                              | 58,678    |   |          |   | 1,231              |  | 8.51  | %               |  |   | 82,475    |   |                    |   | 1,792  |  | 8.81 | %
|                                           |  |                              |           |   |          |   |                    |  |       |                 |  |   |           |   |                    |   |        |  |      |  
|Total interest-bearing liabilities         |  |                              | 2,605,494 |   |          |   | 23,265             |  | 3.62  | %               |  |   | 2,362,270 |   |                    |   | 17,220 |  | 2.96 | %
|                                           |  |                              |           |   |          |  
|Noninterest-bearing sources:               |  |                              |           |   |          |   |                    |  |       |                 |  |   |           |   |                    |   |        |  |      |  
|Demand deposits                            |  |                              | 1,031,046 |   |          |   |                    |  |       |                 |  |   | 997,237   |   |                    |   |        |  |      |  
|Other liabilities                          |  |                              | 51,380    |   |          |   |                    |  |       |                 |  |   | 32,339    |   |                    |   |        |  |      |  
|                                           |  |                              |           |   |          |   |                    |  |       |                 |  |   |           |   |                    |   |        |  |      |  
|Total noninterest-bearing liabilities      |  |                              | 1,082,426 |   |          |   |                    |  |       |                 |  |   | 1,029,576 |   |                    |   |        |  |      |  
|                                           |  |                              |           |   |          |  
|Shareholders equity                       |  |                              | 416,900   |   |          |   |                    |  |       |                 |  |   | 340,180   |   |                    |   |        |  |      |  
|                                           |  |                              |           |   |          |   |                    |  |       |                 |  |   |           |   |                    |   |        |  |      |  
|Total liabilities and shareholders equity |  | $                            | 4,104,820 |   |          |   |                    |  |       |                 |  | $ | 3,732,026 |   |                    |   |        |  |      |  
|                                           |  |                              |           |   |          |   |                    |  |       |                 |  |   |           |   |                    |   |        |  |      |  
|Net interest income & margin (2)           |  |                              |           |   |          | $ | 44,589             |  | 4.87  | %               |  |   |           |   |                    | $ | 40,692 |  | 4.88 | %
|                                           |  |                              |           |   |          |   |                    |  |       |                 |  |   |           |   |                    |   |        |  |      |  

---

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

|(2) | The net interest margin is equal to net interest income divided by average total interest-earning assets.
|--- | ---------------------------------------------------------------------------------------------------------



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##### Table of Contents

Noninterest IncomeNoninterest income consisted of the following (in thousands):



|                                  |  |                                      |       |      |   |       |  
|--------------------------------- |  | ------------------------------------ | ----- | ---- | - | ----- | -
|                                  |  | For the Three Months Ended March 31, |      
|                                  |  | 2007                                 |       | 2006 |  
|Customer service fees             |  | $                                    | 3,375 |      | $ | 2,577 |  
|Net gain (loss) on trading assets |  |                                      | 1     |      |   | (135  | )
|Net gain on the sale of loans     |  |                                      | 504   |      |   | 305   |  
|Bank owned life insurance         |  |                                      | 796   |      |   | 731   |  
|Debit card income                 |  |                                      | 525   |      |   | 465   |  
|FHLB stock dividends              |  |                                      | 240   |      |   | 234   |  
|Other                             |  |                                      | 2,493 |      |   | 2,313 |  
|                                  |  |                                      |       |      |   |       |  
|                                  |  | $                                    | 7,934 |      | $ | 6,490 |  
|                                  |  |                                      |       |      |   |       |  

Customer service fees for the three months ended March 31, 2007 increased $798 thousand compared to the same
period in 2006. This increase was due, in part, to the addition of new deposit products and changes in the application of service charges.

Net gain on the
sale of loans increased $199 thousand for the three month period ended March 31, 2007 compared to the same period in 2006. This increase was due primarily to the sale of approximately $20 million of performing commercial real estate loans from
the held for investment portfolio during the first quarter of 2007 as part of our ongoing management of the size, concentration, and risk profile of the commercial real estate portfolio.

Other noninterest income increased $180 thousand for the three months ended March 31, 2007 compared to the same period in 2006. This increase was due, in part, to $138 thousand of gain amortization from a
sale/leaseback transaction completed in the fourth quarter of 2006. The remaining deferred gain of $8.7 million for this transaction will be recognized over the remaining lease terms.

Noninterest ExpenseNoninterest expense consisted of the following (in thousands):



|                                                                                   |  |                                      |        |   |      |   |       
|---------------------------------------------------------------------------------- |  | ------------------------------------ | ------ | - | ---- | - | ------
|                                                                                   |  | For the Three Months Ended March 31,
|                                                                                   |  | 2007                                 |        |   | 2006
|Salaries and employee benefits                                                     |  | $                                    | 19,688 |   |      | $ | 18,675
|Occupancy                                                                          |  |                                      | 4,362  |   |      |   | 3,843 
|Technology                                                                         |  |                                      | 2,049  |   |      |   | 1,474 
|Professional fees                                                                  |  |                                      | 945    |   |      |   | 1,425 
|Postage, delivery and supplies                                                     |  |                                      | 811    |   |      |   | 790   
|Marketing                                                                          |  |                                      | 355    |   |      |   | 384   
|Core deposit intangibles amortization                                              |  |                                      | 420    |   |      |   | 194   
|Acquisition costs                                                                  |  |                                      | 754    |   |      |   |      
|Net losses (gains) and carrying costs of other real estate and foreclosed property |  |                                      | (33    | ) |      |   | 20    
|Other                                                                              |  |                                      | 4,483  |   |      |   | 4,153 
|                                                                                   |  |                                      |        |   |      |   |       
|Total                                                                              |  | $                                    | 33,834 |   |      | $ | 30,958
|                                                                                   |  |                                      |        |   |      |   |       

Salaries and employee benefits for the three month period ended March 31, 2007 increased $1.0 million
compared to the same period in 2006. This increase was primarily due to the acquisition of Bank of the Hills during the third quarter of 2006.

Occupancy
expense for the three month period ended March 31, 2007 increased $519 thousand or 13.5% compared to the same period in 2006. During 2006, we completed three separate sale/leaseback transactions of 18 banking centers resulting in additional
rental expense which was partially offset by a reduction in depreciation. Additionally, occupancy increased due to five additional banking centers acquired with Bank of the Hills.



24



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##### Table of Contents

Technology expense increased $575 thousand or 39.0% for the three month period ended March 31, 2007 compared to the
same period in 2006. This increase was due to depreciation associated with additional hardware and customer products including an upgrade in the Banks deposit system in 2006.

Professional fees decreased $480 thousand or 33.7% for the three month period ended March 31, 2007 compared to the same period in 2006, due in part to a decrease in consulting fees. In the first quarter of 2007,
we reevaluated our need for the use of consultants and other professionals and determined that in certain areas we have the resources within the Company that have the skills necessary to handle these specialized tasks.

Other noninterest expense was $4.5 million for the three months ended March 31, 2007 up $330 thousand or 7.9% compared with the same period in 2006. No single
component of other noninterest expense made up a significant portion of the change from the first quarter of 2006.

Income Taxes  We
provided $6.4 million for federal and state income taxes during the three month period ended March 31, 2007 and $4.9 million for the same period of 2006. The effective tax rate for the first quarter of 2007 was approximately 35% as compared to
33% for the same period in 2006. This increase is due to the anticipated impact of the new Texas margin tax. We expect our effective tax rate to be approximately 34% to 35% for the remainder of 2007 subject to the final resolution of the margin tax
from the Texas legislature.

FINANCIAL CONDITION

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



|                                |  |                |           |   |                   |   |        |   |           |  |       |  
|------------------------------- |  | -------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                |  | March 31, 2007 |           |   | December 31, 2006 |  
|                                |  | Amount         |           | % |                   |   | Amount |   | %         | 
|Commercial and industrial       |  | $              | 838,764   |   | 26.3              | % |        | $ | 824,494   |  | 26.8  | %
|Real estate:                    |  |                |           |   |                   |   |        |   |           |  |       |  
|Commercial                      |  |                | 1,358,354 |   | 42.6              | % |        |   | 1,336,465 |  | 43.4  | %
|Construction                    |  |                | 666,135   |   | 20.9              | % |        |   | 597,985   |  | 19.4  | %
|Residential mortgage            |  |                | 215,476   |   | 6.8               | % |        |   | 209,163   |  | 6.8   | %
|Consumer/other                  |  |                | 81,577    |   | 2.6               | % |        |   | 79,642    |  | 2.6   | %
|Foreign loans                   |  |                | 26,295    |   | 0.8               | % |        |   | 30,096    |  | 1.0   | %
|                                |  |                |           |   |                   |   |        |   |           |  |       |  
|Total loans held for investment |  | $              | 3,186,601 |   | 100.0             | % |        | $ | 3,077,845 |  | 100.0 | %
|                                |  |                |           |   |                   |   |        |   |           |  |       |  

At March 31, 2007, loans held for investment were $3.2 billion, an increase of $109 million or 3.5% over
loans held for investment at December 31, 2006. Loans acquired as a result of the acquisition of Partners Bank on March 30, 2007 totaled $142 million. The decrease in internal loan growth was primarily due to significant payoffs in the
energy portfolio related to customer liquidity, competitive pricing and terms on larger credits and seasonality. Additionally, we sold approximately $20 million of performing commercial real estate loans from the held for investment portfolio during
the first quarter of 2007 as part of our ongoing management of the size, concentration, and risk profile of the commercial real estate portfolio.

Our
primary lending focus is commercial loans and owner-occupied real estate loans to businesses with annual sales ranging from $300 thousand to $35 million. Typically our customers have financing requirements between $50 thousand and $5 million. At
March 31, 2007, commercial real estate loans and commercial and industrial loans were 42.6% and 26.3%, respectively, of loans held for investment.

At
March 31, 2007, loans held for investment were 87.2% of deposits and 73.5% of total assets. As of March 31, 2007, we had no material concentrations of loans. Loans held for investment were 92.3% of deposits and 74.7% of total assets at
December 31, 2006.

Loans Held for SaleLoans held for sale were $53.0 million at March 31, 2007, as compared with $54.7
million at December 31, 2006. Loans held for sale include the guaranteed portion of Small Business Administration (SBA) loans originated by the Bank and loans originated as part of the Banks wholesale lending operations. Due to the timing
of the purchases and sales of SBA and other loans to investors, the balance of loans in the held for sale category at any given time may vary.

Loans are
classified as held for sale when management has positively determined that the loans will be sold in the foreseeable future and the Company has the ability to do so. The classification may be made upon origination or subsequent to the origination or
purchase. Once a decision has been made to sell loans not previously classified as held for sale, such loans are transferred into the held for sale classification and carried at the lower of cost or fair value.



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##### Table of Contents

Trading Assets  Trading assets increased to $85 thousand at March 31, 2007. During 2006, we
significantly reduced our holdings of trading assets in response to current market conditions and our desire to reduce our holdings in these securities. We reinvest in these assets based on market conditions.

SecuritiesThe Companys securities portfolio at March 31, 2007 totaled $601 million, as compared to $574 million at December 31, 2006,
an increase of $26.9 million or 4.7%. The increase in period-end securities was primarily due to the addition of Partners Bank with a total securities portfolio of $10.9 million. We plan for minimal near-term growth in the investment portfolio based
on the need to maintain adequate liquidity and depending on the short-term rate cycle.

Net unrealized losses on the available-for-sale securities were
$8.4 million at March 31, 2007 as compared to $10.2 million at December 31, 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 we have the ability and intent to hold those
investments until a recovery of fair value, which may be at maturity, we do not consider those investments to be other-than-temporarily impaired at March 31, 2007.

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



|                                     |  |                |           |   |                   |   |        |   |           |  |       |  
|------------------------------------ |  | -------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                     |  | March 31, 2007 |           |   | December 31, 2006 |  
|                                     |  | Amount         |           | % |                   |   | Amount |   | %         | 
|Noninterest-bearing demand           |  | $              | 1,132,744 |   | 31.0              | % |        | $ | 1,058,135 |  | 31.7  | %
|Interest-bearing demand              |  |                | 1,320,245 |   | 36.1              | % |        |   | 1,229,313 |  | 36.9  | %
|Certificates and other time deposits |  |                |           |   |                   |   |        |   |           |  |       |  
|Jumbo                                |  |                | 749,285   |   | 20.5              | % |        |   | 610,330   |  | 18.3  | %
|Regular                              |  |                | 325,900   |   | 8.9               | % |        |   | 307,419   |  | 9.2   | %
|Brokered                             |  |                | 127,530   |   | 3.5               | % |        |   | 129,414   |  | 3.9   | %
|                                     |  |                |           |   |                   |   |        |   |           |  |       |  
|Total deposits                       |  | $              | 3,655,704 |   | 100.0             | % |        | $ | 3,334,611 |  | 100.0 | %
|                                     |  |                |           |   |                   |   |        |   |           |  |       |  

Total deposits as of March 31, 2007 increased $321 million to $3.7 billion, up 9.6% compared to $3.3 billion
at December 31, 2006. Deposits acquired in the acquisition of Partners Bank on March 30, 2007 totaled $166 million. The internal deposit growth we experienced during the first three months of 2007 was driven primarily by interest-bearing
and certificates and other time deposits. The percentage of interest-bearing and noninterest-bearing demand deposits to total deposits as of March 31, 2007 was 36.1% and 31.0%, respectively, and our loan to deposit ratio remained at 88.6%.

Short-term borrowings  As of March 31, 2007, we had $32.4 million in short-term borrowings compared to $221 million at
December 31, 2006, a decrease of $188 million or 85.3%. Our primary source of short-term borrowings is the Federal Home Loan Bank. At March 31, 2007, borrowings under FHLB advances totaled $500 thousand and had a maturity of 4 years. The
interest rate on this borrowing was 4.22% at March 31, 2007. We utilize these borrowings to meet liquidity needs. Maturing advances are replaced by drawing on available cash, making additional borrowings or through increased customer deposits.
The decrease in borrowings was due to an increase in lower-cost interest and noninterest-bearing deposits.

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.

Potential problem loans are those loans not classified as nonperforming, but where information that is known by management indicates serious doubt that
the borrower will be able to comply with the present payment terms.



26



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##### Table of Contents

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



|                                                               |  |                |         |                   |   |        
|-------------------------------------------------------------- |  | -------------- | ------- | ----------------- | - | -------
|                                                               |  | March 31, 2007 |         | December 31, 2006
|Nonperforming loans:                                           |  |                |         |                   |   |        
|Nonaccrual                                                     |  | $              | 12,269  |                   | $ | 10,611 
|Restructured                                                   |  |                | 777     |                   |   | 776    
|Real estate acquired by foreclosure                            |  |                | 2,624   |                   |   | 1,465  
|Other repossessed assets                                       |  |                | 191     |                   |   | 404    
|                                                               |  |                |         |                   |   |        
|Total nonperforming assets                                     |  | $              | 15,861  |                   | $ | 13,256 
|                                                               |  |                |         |                   |   |        
|Potential problem loans                                        |  | $              | 28,493  |                   | $ | 32,201 
|                                                               |  |                |         |                   |   |        
|Accruing loans past due 90 days or more                        |  | $              | 4,575   |                   | $ | 2,731  
|                                                               |  |                |         |                   |   |        
|                                                               |  |               
|Period-end allowance for loan losses to nonperforming loans    |  |                | 256.69% |                   |   | 281.27%
|Nonperforming loans to period-end loans                        |  |                | 0.40%   |                   |   | 0.36%  
|Nonperforming assets to period-end assets                      |  |                | 0.37%   |                   |   | 0.32%  
|Nonperforming assets to period-end loans and foreclosed assets |  |                | 0.49%   |                   |   | 0.42%  

Nonperforming assets were $15.9 million at March 31, 2007, a $2.6 million increase from December 31,
2006. This increase is related to two real estate secured loans totaling approximately $2.0 million. Accruing loans past due 90 days or more at March 31, 2007 totaled $4.6 million and consisted primarily of government guaranteed loans.

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 months ended March 31, 2007 was $370 thousand as compared to $1.3 million for the same period in 2006. The lower provision for credit losses during the three months
ended March 31, 2007 was due to favorable improvements in net charge-offs for this same time period and is reflective of the general improvement in our asset quality that has been a function of both a healthy Texas economy and a strengthening
in our credit culture.

Net charge-offs were $406 thousand or 0.05% (annualized) of average loans for the three months ended March 31, 2007. Net
charge-offs decreased $1.2 million for the three months ended March 31, 2007 compared to the same period in 2006. 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 March 31, 2007 was $33.5 million and represented 1.03% of total loans.
The allowance for loan losses at March 31, 2007 was 256.69% of nonperforming loans, down from 281.27% at December 31, 2006. The reserve for unfunded lending commitments remained unchanged at $927 thousand as of March 31, 2007 and
December 31, 2006.



27



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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 Ended March 31, |        
|                                                                       | 
|                                                                       |  | 2007                         |         | 2006 |  
|Allowance for loan losses at beginning of period                       |  | $                            | 32,027  |      | $ | 31,230  |  
|Charge-offs:                                                           |  |                              |         |      |   |         |  
|Commercial, financial, and industrial                                  |  |                              | 535     |      |   | 1,028   |  
|Real estate, mortgage and construction                                 |  |                              | 120     |      |   | 1,005   |  
|Consumer                                                               |  |                              | 325     |      |   | 113     |  
|                                                                       |  |                              |         |      |   |         |  
|Total charge-offs                                                      |  |                              | 980     |      |   | 2,146   |  
|                                                                       |  |                              |         |      |   |         |  
|Recoveries                                                             |  |                              |         |      |   |         |  
|Commercial, financial, and industrial                                  |  |                              | 406     |      |   | 385     |  
|Real estate, mortgage and construction                                 |  |                              | 2       |      |   | 3       |  
|Consumer                                                               |  |                              | 166     |      |   | 120     |  
|                                                                       |  |                              |         |      |   |         |  
|Total recoveries                                                       |  |                              | 574     |      |   | 508     |  
|                                                                       |  |                              |         |      |   |         |  
|Net charge-offs                                                        |  |                              | 406     |      |   | 1,638   |  
|Allowance for credit losses associated with acquired institution       |  |                              | 1,496   |      |   |        |  
|Provision for loan losses                                              |  |                              | 370     |      |   | 1,524   |  
|                                                                       |  |                              |         |      |   |         |  
|Allowance for loan losses at end of period                             |  |                              | 33,487  |      |   | 31,116  |  
|                                                                       |  |                              |         |      |   |         |  
|                                                                       |  |                             
|Reserve for losses on unfunded loan commitments at beginning of period |  |                              | 927     |      |   | 1,173   |  
|Provision for losses on unfunded loan commitments                      |  |                              |        |      |   | (198    | )
|                                                                       |  |                              |         |      |   |         |  
|Reserve for losses on unfunded loan commitments at end of period       |  |                              | 927     |      |   | 975     |  
|                                                                       |  |                              |         |      |   |         |  
|Total allowance for credit losses                                      |  | $                            | 34,414  |      | $ | 32,091  |  
|                                                                       |  |                              |         |      |   |         |  
|                                                                       |  |                             
|Period-end allowance for credit losses to period-end loans             |  |                              | 1.06%   |      |   | 1.16%   |  
|Period-end allowance for loan losses to period-end loans               |  |                              | 1.03%   |      |   | 1.13%   |  
|Period-end allowance for loan losses to nonperforming loans            |  |                              | 256.69% |      |   | 161.90% |  
|Nonperforming assets to period-end loans and foreclosed assets         |  |                              | 0.49%   |      |   | 0.81%   |  
|Nonperforming loans to period-end loans                                |  |                              | 0.40%   |      |   | 0.70%   |  
|Nonperforming assets to period-end assets                              |  |                              | 0.37%   |      |   | 0.60%   |  
|Net charge-offs to average loans (annualized)                          |  |                              | 0.05%   |      |   | 0.24%   |  

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 and static balance sheet rate shocks. Dynamic simulation analysis is the primary tool used to measure interest rate risk and allows 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 March 31, 2007 and December 31, 2006:



|                                         |  |                                           
|---------------------------------------- |  | ------------------------------------------
|Changes in Interest Rates (Basis Points) |  | Increase (Decrease) in Net Interest Income
|March 31, 2007                           |  |                                           
|+200                                     |  | 1.69%                                     
|+100                                     |  | 0.55%                                     
|Base                                     |  | 0.00%                                     
|-100                                     |  | -3.16%                                    
|-200                                     |  | -5.92%                                    
|                                         | 
|December 31, 2006                        |  |                                           
|+200                                     |  | 0.56%                                     
|+100                                     |  | -0.06%                                    
|Base                                     |  | 0.00%                                     
|-100                                     |  | -2.78%                                    
|-200                                     |  | -5.27%                                    

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 curve, this analysis is not intended to and does not provide a precise forecast of the effect actual
changes in market rates will have on us. 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 effect actual changes in market rates may have on us.

During July 2006, we executed a hedging strategy utilizing interest rate derivatives designed as a means to mitigate some of the Companys asset sensitivity. We
purchased an interest rate floor contract and an interest rate collar contract. These contracts were designated as cash flow hedges of the monthly interest receipts from our portfolio of variable-rate loans.

CAPITAL AND LIQUIDITY

CapitalAt March 31,
2007, shareholders equity totaled $445 million or 10.27% of total assets, as compared to $409 million or 9.94% of total assets at December 31, 2006. Our risk-based capital ratios together with the minimum capital amounts and ratios at
March 31, 2007 were as follows (dollars in thousands):



|                                         |  |        |         |       |                   |   |                     |   |         |  |     |  
|---------------------------------------- |  | ------ | ------- | ----- | ----------------- | - | ------------------- | - | ------- |  | --- | -
|                                         |  |        |         |       |                   |   | For Minimum Capital |  
|                                         |  | Actual |         |       | Adequacy Purposes |  
|                                         |  | Amount |         | Ratio |                   |   | Amount              |   | Ratio   | 
|Total capital (to risk weighted assets)  |  | $      | 435,651 |       | 11.2              | % |                     | $ | 311,712 |  | 8.0 | %
|Tier 1 capital (to risk weighted assets) |  |        | 354,772 |       | 9.1               | % |                     |   | 155,856 |  | 4.0 | %
|Tier 1 capital (to average assets)       |  |        | 354,772 |       | 9.0               | % |                     |   | 157,382 |  | 4.0 | %

See Note 14 to our Consolidated Financial Statements for further discussion of regulatory capital requirements.

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



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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 amortizing securities and loan portfolios. For more information
regarding liquidity, please refer to our 2006 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. At
March 31, 2007, there was an aggregate of approximately $122 million available for payment of dividends by Sterling Bank. At March 31, 2007, the aggregate amount of dividends, which legally could be paid without prior approval of various
regulatory agencies, totaled $43.7 million. It is not anticipated that such restrictions will have an impact on the ability of Sterling Bancshares to meet its ongoing cash obligations.



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

There
have been no material changes in market risk we face since December 31, 2006. 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  The Company maintains disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as amended (the Exchange Act), that are designed to
provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified by the Commissions rules and forms, and that information is accumulated and communicated to the Companys management, including its principal executive and financial officers, as
appropriate, to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of is management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, such officers have concluded that the design and operation
of these disclosure controls and procedures were effective.

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.

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, 2006. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.



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

On
April 25, 2005, the Companys Board of Directors authorized the repurchase up to 2,500,000 shares of common stock, not to exceed 500,000 shares in any calendar year. On January 29, 2007, the Companys Board of Directors
authorized an increase in the number of shares to be repurchased to adjust for the three-for-two stock split approved by the Board on October 30, 2006. The Company is now authorized to repurchase up to 3,750,000 shares of common stock, not to
exceed 750,000 shares in any calendar year. The Company may repurchase shares of common stock from time to time in the open market or through privately negotiated transactions. The Company funds share repurchases from available cash or short-term
borrowings.



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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 March 31, 2007:



|                                      |  |                                |  |                                     |       |                                                                     |           |                                                |          
|------------------------------------- |  | ------------------------------ |  | ----------------------------------- | ----- | ------------------------------------------------------------------- | --------- | ---------------------------------------------- | ---------
|Period                                |  | Total Numberof SharesPurchased |  | WeightedAverage PricePaid per Share |       | Total Number of SharesPurchased as Part of Publicly Announced
Plans |           | Shares That May YetBe Purchased Underthe Plans
|January 1, 2007 to January 31, 2007   |  | 41,000                         |  | $                                   | 12.52 |                                                                     | 978,500   |                                                | 2,771,500
|February 1, 2007 to February 28, 2007 |  | 79,500                         |  | $                                   | 12.06 |                                                                     | 1,058,000 |                                                | 2,692,000
|March 1, 2007 to March 31, 2007       |  | 67,000                         |  | $                                   | 11.57 |                                                                     | 1,125,000 |                                                | 2,625,000



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

Not applicable.



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

Not
applicable.



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

Not applicable.



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



|       |  |                                                                                                                                                                                                                                                         
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1    |  | Agreement and Plan of Merger dated January 24, 2007, by and among Sterling Bancshares, Inc. and Partners Bank of Texas. (Incorporated by reference to Exhibit 2.1 of the Companys
Current Report on Form 8-K on January 25, 2007 (File No. 000-20750)).
|       | 
|11     |  | Statement Regarding Computation of Earnings Per Share (included as Note (11) 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 Zach L. Wasson, 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: May 9, 2007 |  | By:                       |  | /s/ J. Downey Bridgwater                    
|                  |  |                           |  | J. Downey Bridgwater                        
|                  |  |                           |  | Chairman, President and                     
|                  |  |                           |  | Chief Executive Officer                     
|                  |  |                           |  | (Principal Executive Officer)               
|                  |  |                          
|Date: May 9, 2007 |  | By:                       |  | /s/ Zach L. Wasson                          
|                  |  |                           |  | Zach L. Wasson                              
|                  |  |                           |  | Executive Vice President                    
|                  |  |                           |  | and Chief Financial Officer                 
|                  |  |                           |  | (Principal Financial and Accounting Officer)



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EXHIBIT INDEX



|        |  |                                                                                                                                                                                                                                                               
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                   
|2.1     |  | Agreement and Plan of Merger dated January 24, 2007, by and among Sterling Bancshares, Inc. and Partners Bank of Texas. (Incorporated by reference to Exhibit 2.1 of the Companys Current
Report on Form 8-K filed on January 25, 2007 (File No. 000-20750)).
|        | 
|11      |  | Statement Regarding Computation of Earnings Per Share (included as Note (11) 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 Zach L. Wasson, 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.
|-- | ----------------------



33