##### 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 September 30, 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 incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|2550 North Loop West, Suite 600 Houston, Texas                 |  | 77092                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

713-466-8300

(Registrants telephone number, including area code)

[None]

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



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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 November 1,
2007
|[Common Stock, $1.00 par value per share] |  | 73,006,972 shares              



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##### Table of Contents

STERLING BANCSHARES, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 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                            |  | 33
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 33
|           |  |                                                                                      
|PART II.   |  | OTHER INFORMATION                                                                     |  |   
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 34
|           |  |                                                                                      
|Item 1A.   |  | Risk Factors                                                                          |  | 34
|           |  |                                                                                      
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 34
|           |  |                                                                                      
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 34
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 34
|           |  |                                                                                      
|Item 5.    |  | Other Information                                                                     |  | 34
|           |  |                                                                                      
|Item 6.    |  | Exhibits                                                                              |  | 35
|           | 
|SIGNATURES |  | 36                                                                                   



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)



|                                                                                                                                                                                                |  |                   |           |                  |   |          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | ---------------- | - | ---------
|                                                                                                                                                                                                |  | September 30,2007 |           | December 31,2006
|ASSETS                                                                                                                                                                                          |  |                   |           |                  |   |          
|Cash and cash equivalents                                                                                                                                                                       |  | $                 | 110,876   |                  | $ | 134,775  
|Interest-bearing deposits in financial institutions                                                                                                                                             |  |                   |          |                  |   | 198      
|Available-for-sale securities, at fair value                                                                                                                                                    |  |                   | 464,789   |                  |   | 409,351  
|Held-to-maturity securities, at amortized cost                                                                                                                                                  |  |                   | 176,847   |                  |   | 164,263  
|                                                                                                                                                                                                |  |                  
|Loans held for sale                                                                                                                                                                             |  |                   | 54,699    |                  |   | 54,722   
|Loans held for investment                                                                                                                                                                       |  |                   | 3,319,652 |                  |   | 3,077,845
|                                                                                                                                                                                                |  |                   |           |                  |   |          
|Total loans                                                                                                                                                                                     |  |                   | 3,374,351 |                  |   | 3,132,567
|Allowance for loan losses                                                                                                                                                                       |  |                   | (34,225)  |                  |   | (32,027) 
|                                                                                                                                                                                                |  |                   |           |                  |   |          
|Loans, net                                                                                                                                                                                      |  |                   | 3,340,126 |                  |   | 3,100,540
|                                                                                                                                                                                                |  |                  
|Premises and equipment, net                                                                                                                                                                     |  |                   | 26,624    |                  |   | 23,475   
|Real estate acquired by foreclosure                                                                                                                                                             |  |                   | 2,713     |                  |   | 1,465    
|Goodwill                                                                                                                                                                                        |  |                   | 166,130   |                  |   | 130,858  
|Core deposit and other intangibles, net                                                                                                                                                         |  |                   | 16,562    |                  |   | 10,299   
|Accrued interest receivable                                                                                                                                                                     |  |                   | 20,520    |                  |   | 18,692   
|Other assets                                                                                                                                                                                    |  |                   | 114,990   |                  |   | 123,643  
|                                                                                                                                                                                                |  |                   |           |                  |   |          
|TOTAL ASSETS                                                                                                                                                                                    |  | $                 | 4,440,177 |                  | $ | 4,117,559
|                                                                                                                                                                                                |  |                   |           |                  |   |          
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                            |  |                   |           |                  |   |          
|LIABILITIES:                                                                                                                                                                                    |  |                   |           |                  |   |          
|Deposits:                                                                                                                                                                                       |  |                   |           |                  |   |          
|Noninterest-bearing demand                                                                                                                                                                      |  | $                 | 1,082,037 |                  | $ | 1,058,135
|Interest-bearing demand                                                                                                                                                                         |  |                   | 1,340,746 |                  |   | 1,229,313
|Certificates and other time                                                                                                                                                                     |  |                   | 1,238,980 |                  |   | 1,047,163
|                                                                                                                                                                                                |  |                   |           |                  |   |          
|Total deposits                                                                                                                                                                                  |  |                   | 3,661,763 |                  |   | 3,334,611
|Other borrowed funds                                                                                                                                                                            |  |                   | 136,555   |                  |   | 220,675  
|Subordinated debt                                                                                                                                                                               |  |                   | 46,986    |                  |   | 46,135   
|Junior subordinated debt                                                                                                                                                                        |  |                   | 82,734    |                  |   | 56,959   
|Accrued interest payable and other liabilities                                                                                                                                                  |  |                   | 49,104    |                  |   | 49,894   
|                                                                                                                                                                                                |  |                   |           |                  |   |          
|Total liabilities                                                                                                                                                                               |  |                   | 3,977,142 |                  |   | 3,708,274
|                                                                                                                                                                                                |  |                  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                   |  |                   |          |                  |   |         
|                                                                                                                                                                                                |  |                  
|SHAREHOLDERS EQUITY:                                                                                                                                                                           |  |                   |           |                  |   |          
|Preferred stock, $1 par value, 1,000,000 shares authorized, no shares issued and outstanding at September 30, 2007 and December 31,
2006                                                        |  |                   |          |                  |   |         
|Common stock, $1 par value, 150,000,000 shares authorized, 74,793,641 and 71,938,175 issued and 73,026,141 and 71,000,675 outstanding at
September 30, 2007 and December 31, 2006, respectively |  |                   | 74,794    |                  |   | 71,938   
|Capital surplus                                                                                                                                                                                 |  |                   | 108,964   |                  |   | 80,927   
|Retained earnings                                                                                                                                                                               |  |                   | 300,375   |                  |   | 272,179  
|Treasury stock, at cost, 1,767,500 and 937,500 shares held at September 30, 2007 and December 31, 2006, respectively                                                                            |  |                   | (20,493)  |                  |   | (10,902) 
|Accumulated other comprehensive loss, net of tax                                                                                                                                                |  |                   | (605)     |                  |   | (4,857)  
|                                                                                                                                                                                                |  |                   |           |                  |   |          
|Total shareholders equity                                                                                                                                                                      |  |                   | 463,035   |                  |   | 409,285  
|                                                                                                                                                                                                |  |                   |           |                  |   |          
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                      |  | $                 | 4,440,177 |                  | $ | 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 EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                      |  | 2007                            |        | 2006                           |   | 2007   |  | 2006
|Interest income:                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Loans, including fees                                 |  | $                               | 67,033 |                                | $ | 58,158 |  | $    | 193,872 |  | $ | 164,199
|Securities:                                           |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Taxable                                               |  |                                 | 6,111  |                                |   | 5,902  |  |      | 17,327  |  |   | 18,062 
|Non-taxable                                           |  |                                 | 867    |                                |   | 549    |  |      | 2,597   |  |   | 1,700  
|Trading assets                                        |  |                                 | 81     |                                |   | 73     |  |      | 86      |  |   | 643    
|Federal funds sold                                    |  |                                 | 58     |                                |   | 55     |  |      | 480     |  |   | 140    
|Deposits in financial institutions                    |  |                                 | 9      |                                |   | 34     |  |      | 33      |  |   | 124    
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Total interest income                                 |  |                                 | 74,159 |                                |   | 64,771 |  |      | 214,395 |  |   | 184,868
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Interest expense:                                     |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Demand and savings deposits                           |  |                                 | 8,038  |                                |   | 4,971  |  |      | 21,682  |  |   | 11,931 
|Certificates and other time deposits                  |  |                                 | 14,809 |                                |   | 9,898  |  |      | 41,081  |  |   | 25,574 
|Other borrowed funds                                  |  |                                 | 1,369  |                                |   | 4,690  |  |      | 5,121   |  |   | 13,265 
|Subordinated debt                                     |  |                                 | 1,175  |                                |   | 1,155  |  |      | 3,487   |  |   | 3,335  
|Junior subordinated debt                              |  |                                 | 1,673  |                                |   | 1,152  |  |      | 4,562   |  |   | 4,353  
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Total interest expense                                |  |                                 | 27,064 |                                |   | 21,866 |  |      | 75,933  |  |   | 58,458 
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Net interest income                                   |  |                                 | 47,095 |                                |   | 42,905 |  |      | 138,462 |  |   | 126,410
|Provision for credit losses                           |  |                                 | 850    |                                |   | 895    |  |      | 2,220   |  |   | 4,058  
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Net interest income after provision for credit losses |  |                                 | 46,245 |                                |   | 42,010 |  |      | 136,242 |  |   | 122,352
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Noninterest income:                                   |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Customer service fees                                 |  |                                 | 3,629  |                                |   | 3,398  |  |      | 10,532  |  |   | 9,210  
|Net gain (loss) on trading assets                     |  |                                 | 2      |                                |   |       |  |      | 2       |  |   | (302)  
|Net gain on the sale of loans                         |  |                                 | 1,208  |                                |   | 292    |  |      | 1,785   |  |   | 802    
|Other                                                 |  |                                 | 5,794  |                                |   | 3,814  |  |      | 13,766  |  |   | 13,303 
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Total noninterest income                              |  |                                 | 10,633 |                                |   | 7,504  |  |      | 26,085  |  |   | 23,013 
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Noninterest expense:                                  |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Salaries and employee benefits                        |  |                                 | 20,634 |                                |   | 18,843 |  |      | 60,090  |  |   | 56,340 
|Occupancy                                             |  |                                 | 4,706  |                                |   | 4,018  |  |      | 13,674  |  |   | 11,922 
|Technology                                            |  |                                 | 2,260  |                                |   | 1,695  |  |      | 6,404   |  |   | 4,784  
|Professional fees                                     |  |                                 | 1,068  |                                |   | 1,408  |  |      | 3,091   |  |   | 4,306  
|Postage, delivery and supplies                        |  |                                 | 903    |                                |   | 801    |  |      | 2,657   |  |   | 2,494  
|Marketing                                             |  |                                 | 432    |                                |   | 675    |  |      | 1,368   |  |   | 1,768  
|Core deposit and other intangibles amortization       |  |                                 | 610    |                                |   | 195    |  |      | 1,547   |  |   | 584    
|Acquisition costs                                     |  |                                 |       |                                |   | 638    |  |      | 920     |  |   | 638    
|Other                                                 |  |                                 | 4,431  |                                |   | 4,294  |  |      | 13,469  |  |   | 13,882 
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Total noninterest expense                             |  |                                 | 35,044 |                                |   | 32,567 |  |      | 103,220 |  |   | 96,718 
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Income before income taxes                            |  |                                 | 21,834 |                                |   | 16,947 |  |      | 59,107  |  |   | 48,647 
|Provision for income taxes                            |  |                                 | 7,255  |                                |   | 5,218  |  |      | 19,507  |  |   | 15,617 
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Net Income                                            |  | $                               | 14,579 |                                | $ | 11,729 |  | $    | 39,600  |  | $ | 33,030 
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Earnings per share:                                   |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Basic                                                 |  | $                               | 0.20   |                                | $ | 0.17   |  | $    | 0.55    |  | $ | 0.49   
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Diluted                                               |  | $                               | 0.20   |                                | $ | 0.17   |  | $    | 0.54    |  | $ | 0.48   
|                                                      |  |                                 |        |                                |   |        |  |      |         |  |   |        

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 OtherComprehensive Loss |         | 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                                                                                         |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   | 33,030   |  |       |  |   |          |  |   |         |  |   | 33,030  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of ($755) |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  |       |  |   |          |  |   | (1,403) |  |   | (1,403) 
|Net change in unrealized gains on effective cash flow hedging derivatives, net of taxes of $1,244  |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  |       |  |   |          |  |   | 2,310   |  |   | 2,310   
|                                                                                                   |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  |       |  |   |          |  |   |         |  |   |         
|Total comprehensive income                                                                         |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  |       |  |   |          |  |   |         |  |   | 33,937  
|                                                                                                   |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  |       |  |   |          |  |   |         |  |   |         
|Issuance of common stock                                                                           |  |                 |  |              |   |                | 629    |                  |   | 629            |  |                                     | 5,846   |        |   |          |  |       |  |   |          |  |   |         |  |   | 6,475   
|Issuance of common stock in connection with the purchase of BOTH Inc.                              |  |                 |  |              |   |                | 3,023  |                  |   | 3,023          |  |                                     | 37,948  |        |   |          |  |       |  |   |          |  |   |         |  |   | 40,971  
|Repurchase of common stock                                                                         |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  | 563   |  |   | (6,556)  |  |   |         |  |   | (6,556) 
|Cash dividends paid                                                                                |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   | (9,523)  |  |       |  |   |          |  |   |         |  |   | (9,523) 
|                                                                                                   |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  |       |  |   |          |  |   |         |  |   |         
|BALANCE AT SEPTEMBER 30, 2006                                                                      |  |                |  | $            |  |                | 71,839 |                  | $ | 71,839         |  | $                                   | 79,822  |        | $ | 262,678  |  | 751   |  | $ | (8,540)  |  | $ | (6,023) |  | $ | 399,776 
|                                                                                                   |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  |       |  |   |          |  |   |         |  |   |         
|BALANCE AT JANUARY 1, 2007                                                                         |  |                |  | $            |  |                | 71,938 |                  | $ | 71,938         |  | $                                   | 80,927  |        | $ | 272,179  |  | 938   |  | $ | (10,902) |  | $ | (4,857) |  | $ | 409,285 
|                                                                                                   |  |                 |  |              |   |                |        |                  |   |               
|Comprehensive income:                                                                              |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  |       |  |   |          |  |   |         |  |   |         
|Net income                                                                                         |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   | 39,600   |  |       |  |   |          |  |   |         |  |   | 39,600  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of $1,219 |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  |       |  |   |          |  |   | 2,264   |  |   | 2,264   
|Net change in unrealized gains on effective cash flow hedging derivatives, net of taxes of $1,069  |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  |       |  |   |          |  |   | 1,988   |  |   | 1,988   
|                                                                                                   |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  |       |  |   |          |  |   |         |  |   |         
|Total comprehensive income                                                                         |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  |       |  |   |          |  |   |         |  |   | 43,852  
|                                                                                                   |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  |       |  |   |          |  |   |         |  |   |         
|Issuance of common stock                                                                           |  |                 |  |              |   |                | 511    |                  |   | 511            |  |                                     | 3,861   |        |   |          |  |       |  |   |          |  |   |         |  |   | 4,372   
|Issuance of common stock in connection with the purchase of Partners Bank of Texas                 |  |                 |  |              |   |                | 2,345  |                  |   | 2,345          |  |                                     | 24,176  |        |   |          |  |       |  |   |          |  |   |         |  |   | 26,521  
|Repurchase of common stock                                                                         |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  | 830   |  |   | (9,591)  |  |   |         |  |   | (9,591) 
|Cash dividends paid                                                                                |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   | (11,404) |  |       |  |   |          |  |   |         |  |   | (11,404)
|                                                                                                   |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  |       |  |   |          |  |   |         |  |   |         
|BALANCE AT SEPTEMBER 30, 2007                                                                      |  |                |  | $            |  |                | 74,794 |                  | $ | 74,794         |  | $                                   | 108,964 |        | $ | 300,375  |  | 1,768 |  | $ | (20,493) |  | $ | (605)   |  | $ | 463,035 
|                                                                                                   |  |                 |  |              |   |                |        |                  |   |                |  |                                     |         |        |   |          |  |       |  |   |          |  |   |         |  |   |         

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)



|                                                                                    |  |                                |           |      |   |          
|----------------------------------------------------------------------------------- |  | ------------------------------ | --------- | ---- | - | ---------
|                                                                                    |  | Nine Months endedSeptember 30,
|                                                                                    |  | 2007                           |           | 2006
|CASH FLOWS FROM OPERATING ACTIVITIES:                                               |  |                                |           |      |   |          
|Net income                                                                          |  | $                              | 39,600    |      | $ | 33,030   
|Adjustments to reconcile net income to net cash provided by operating activities:   |  |                                |           |      |   |          
|Amortization and accretion of premiums and discounts on securities, net             |  |                                | 1,705     |      |   | 1,842    
|Net (gain) loss on trading assets                                                   |  |                                | (2)       |      |   | 302      
|Net gain on the sale of loans                                                       |  |                                | (1,785)   |      |   | (802)    
|Provision for credit losses                                                         |  |                                | 2,220     |      |   | 4,058    
|Writedowns, less gains on sale, of real estate acquired by foreclosure              |  |                                | (169)     |      |   | (301)    
|Depreciation and amortization                                                       |  |                                | 6,603     |      |   | 6,219    
|Proceeds from principal paydowns of trading securities                              |  |                                | 1         |      |   | 203      
|Proceeds from the sale of trading securities                                        |  |                                | 13,137    |      |   | 31,113   
|Purchases of trading securities                                                     |  |                                | (13,136)  |      |   | (3,336)  
|Stock-based compensation expense (net of tax benefit recognized)                    |  |                                | 637       |      |   | 1,189    
|Excess tax benefits from share-based payment arrangements                           |  |                                | (387)     |      |   | (562)    
|Net (increase) decrease in loans held for sale                                      |  |                                | (11,739)  |      |   | 1,577    
|Net gain on sale of bank assets                                                     |  |                                | (555)     |      |   | (1,177)  
|Net decrease (increase) in accrued interest receivable and other assets             |  |                                | 10,796    |      |   | (2,026)  
|Net (decrease) increase in accrued interest payable and other liabilities           |  |                                | (4,456)   |      |   | 5,604    
|                                                                                    |  |                                |           |      |   |          
|Net cash provided by operating activities                                           |  |                                | 42,470    |      |   | 76,933   
|CASH FLOWS FROM INVESTING ACTIVITIES:                                               |  |                                |           |      |   |          
|Proceeds from the maturities or calls and paydowns of held-to-maturity securities   |  |                                | 12,925    |      |   | 12,964   
|Proceeds from the maturities or calls and paydowns of available-for-sale securities |  |                                | 65,225    |      |   | 81,585   
|Purchases of available-for-sale securities                                          |  |                                | (107,856) |      |   | (45,041) 
|Purchases of held-to-maturity securities                                            |  |                                | (25,582)  |      |   | (18,006) 
|Net increase in loans held for investment                                           |  |                                | (140,195) |      |   | (313,788)
|Proceeds from sale of real estate acquired by foreclosure                           |  |                                | 1,178     |      |   | 2,563    
|Proceeds from sale of land held for sale                                            |  |                                |          |      |   | 1,570    
|Purchase of Partners Bank of Texas (including transaction costs)                    |  |                                | (25,319)  |      |   |         
|Cash and cash equivalents acquired with Partners Bank of Texas                      |  |                                | 33,324    |      |   |         
|Purchase of MBM Advisors (including transaction costs)                              |  |                                | (6,000)   |      |   |         
|Cash and cash equivalents acquired with MBM Advisors                                |  |                                | 104       |      |   |         
|Purchase of Bank of the Hills, Inc. (including transaction costs)                   |  |                                |          |      |   | (536)    
|Cash and cash equivalents acquired with Bank of the Hills, Inc.                     |  |                                |          |      |   | 27,860   
|Net change in interest-bearing deposits in financial institutions                   |  |                                | 198       |      |   |         
|Proceeds from sale of loans                                                         |  |                                | 49,909    |      |   | 52,011   
|Proceeds from sale of premises and equipment                                        |  |                                | 111       |      |   | 4,100    
|Purchase of premises and equipment                                                  |  |                                | (5,273)   |      |   | (3,551)  
|                                                                                    |  |                                |           |      |   |          
|Net cash used in investing activities                                               |  |                                | (147,251) |      |   | (198,269)
|CASH FLOWS FROM FINANCING ACTIVITIES:                                               |  |                                |           |      |   |          
|Net increase in deposit accounts                                                    |  |                                | 161,386   |      |   | 182,143  
|Net decrease in other borrowed funds                                                |  |                                | (88,834)  |      |   | (20,600) 
|Redemption of junior subordinated debt                                              |  |                                |          |      |   | (29,639) 
|Issuance of trust preferred securities                                              |  |                                | 25,775    |      |   |         
|Proceeds from issuance of common stock                                              |  |                                | 3,163     |      |   | 4,237    
|Repurchase of common stock                                                          |  |                                | (9,591)   |      |   | (6,556)  
|Excess tax benefits from share-based payment arrangements                           |  |                                | 387       |      |   | 562      
|Dividends paid                                                                      |  |                                | (11,404)  |      |   | (9,523)  
|                                                                                    |  |                                |           |      |   |          
|Net cash provided by financing activities                                           |  |                                | 80,882    |      |   | 120,624  
|                                                                                    |  |                                |           |      |   |          
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                           |  |                                | (23,899)  |      |   | (712)    
|CASH AND CASH EQUIVALENTS:                                                          |  |                                |           |      |   |          
|Beginning of period                                                                 |  |                                | 134,775   |      |   | 147,154  
|                                                                                    |  |                                |           |      |   |          
|End of period                                                                       |  | $                              | 110,876   |      | $ | 146,442  
|                                                                                    |  |                                |           |      |   |          
|Supplemental information:                                                           |  |                                |           |      |   |          
|Income taxes paid                                                                   |  | $                              | 12,750    |      | $ | 18,598   
|Interest paid                                                                       |  |                                | 76,111    |      |   | 53,325   
|Noncash investing and financing activities                                         |  |                                |           |      |   |          
|Acquisition of real estate through foreclosure of collateral                        |  |                                | 2,257     |      |   | 3,566    
|Transfer of loans from held for investment to loans held for sale                   |  |                                | 14,368    |      |   | 117,221  
|Acquisition of Bank of the Hills, Inc.                                              |  |                                |           |      |   |          
|Common Stock issued                                                                 |  |                                |          |      |   | 40,971   
|Payable to BOTH, Inc. shareholders                                                  |  |                                |          |      |   | 31,530   
|Acquisition of Partners Bank of Texas                                               |  |                                |           |      |   |          
|Common Stock issued                                                                 |  |                                | 26,521    |      |   |         
|Acquisition of MBM Advisors, Inc.                                                   |  |                                |           |      |   |          
|Payable to MBM Advisors, Inc. shareholders                                          |  |                                | 2,774     |      |   |         

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 in conjunction 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 statement; however, the Company does not expect it to be material to its financial statements.

In September 2006, the Emerging Issues Task Force (EITF) of the FASB ratified EITF Issue No. 06-4 Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 provides that an employer should recognize a liability for future benefits based on the substantive agreement with the employee. The Issue should
be applied to fiscal years beginning after December 15, 2007, with earlier application permitted. Management has not completed its evaluation of this issue; 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 statement; however, the Company does not expect it to be material to its financial statements.



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

On September 25, 2007, the Company and First
Horizon National Corp. (First Horizon) announced the signing of a Definitive Branch Purchase and Assumption Agreement pursuant to which the Company will acquire ten branches located in the Dallas and Fort Worth areas. In addition to
these ten bank branches, the Company also agreed to acquire land from First Horizon for possible future Sterling banking centers in Lewisville, Arlington and Fort Worth. The Agreement contemplates the assumption of selected deposit accounts of
approximately $100 million and the purchase of selected loan accounts of approximately $81 million. This transaction allows the Company to achieve a critical presence in Dallas and an entry into the growing Fort Worth market. The proposed
transaction, which is subject to customary closing conditions, including receipt of regulatory approval, is expected to be completed in the first quarter of 2008.

On June 28, 2007, the Company acquired MBM Advisors, Inc. (MBM Advisors). MBM Advisors was an independent investment advisory and pension administration/consulting firm with approximately $700 million in assets under
management



6



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##### Table of Contents

providing full-services in the design, administration, investment management, and communication of retirement plans with offices in both Houston and Dallas,
Texas. The completion of the acquisition of MBM Advisors provides for increased opportunities to serve the owners of small and medium-sized businesses and their employees while enhancing our noninterest income. The Company entered into a share
exchange agreement with MBM Advisors and the shareholders of MBM Advisors in which the Company paid the shareholders an aggregate amount in cash equal to $6.0 million on the date of merger. An additional aggregate amount of up to $10.0 million is
payable over an earn-out period of the next four calendar years. Included in the earn-out period are unconditional guaranteed cash payments of $3.0 million. This guaranteed consideration was recorded as part of the purchase price at the estimated
net present value. The additional earn-out consideration is contingent upon maintaining or achieving specified earnings levels in future periods. When the contingency is resolved and additional consideration is distributable, the Company will record
the fair value of the consideration issued as an additional cost of the acquisition. The maximum potential amount of future undiscounted payments the Company could be required to make under contingent payment provisions is approximately $7.0 million
in the form of cash. 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 acquired was recorded as goodwill, all of which is expected to
be deductible for tax purposes. The results of operations for this acquisition have been included in the Companys financial results beginning in the third quarter of 2007.

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).



|                                       |  |   |        
|-------------------------------------- |  | - | -------
|Cash and cash equivalents              |  | $ | 104    
|Receivables                            |  |   | 1,518  
|Fixed assets                           |  |   | 33     
|Customer relationship intangibles      |  |   | 3,723  
|Goodwill                               |  |   | 5,257  
|Other assets                           |  |   | 74     
|                                       |  |   |        
|Total assets acquired                  |  |   | 10,709 
|                                       | 
|Accounts payable and other liabilities |  |   | (1,555)
|                                       |  |   |        
|Total liabilities assumed              |  |   | (1,555)
|                                       | 
|Net assets acquired                    |  | $ | 9,154  
|                                       |  |   |        

Customer relationship intangibles are amortized using an economic life method based on client 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 intangibles related to the MBM Advisors acquisition is approximately six years. Additional
information related to intangible assets and goodwill is included in Note 6  Goodwill and Other Intangibles.

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 $26.5 million of the
Companys common stock (2.3 million shares), cash totaling approximately $25.5 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 acquired was recorded as goodwill, none of which is expected to be deductible for tax purposes.



7



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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).



|                                               |  |   |          
|---------------------------------------------- |  | - | ---------
|Cash and cash equivalents                      |  | $ | 33,324   
|Available-for-sale securities                  |  |   | 10,956   
|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                                       |  |   | 30,009   
|Other assets                                   |  |   | 599      
|                                               |  |   |          
|Total assets acquired                          |  |   | 223,551  
|                                               | 
|Deposits                                       |  |   | (165,766)
|Other borrowed funds                           |  |   | (4,714)  
|Accrued interest payable and other liabilities |  |   | (806)    
|                                               |  |   |          
|Total liabilities assumed                      |  |   | (171,286)
|                                               | 
|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 six
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.



8



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

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



|                                                                    |  |                    |         |                      |   |                       |  |            |          |  |   |        
|------------------------------------------------------------------- |  | ------------------ | ------- | -------------------- | - | --------------------- |  | ---------- | -------- |  | - | -------
|                                                                    |  | September 30, 2007
|                                                                    |  | AmortizedCost      |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | Fair Value
|Available-for-Sale                                                  |  |                    |         |                      |   |                       |  |            |          |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                  | 16,025  |                      | $ | 31                    |  | $          | (17)     |  | $ | 16,039 
|Obligations of states of the U.S. and political subdivisions        |  |                    | 1,694   |                      |   | 13                    |  |            | (2)      |  |   | 1,705  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                    | 439,854 |                      |   | 773                   |  |            | (6,555)  |  |   | 434,072
|Other securities                                                    |  |                    | 13,968  |                      |   |                      |  |            | (995)    |  |   | 12,973 
|                                                                    |  |                    |         |                      |   |                       |  |            |          |  |   |        
|Total                                                               |  | $                  | 471,541 |                      | $ | 817                   |  | $          | (7,569)  |  | $ | 464,789
|                                                                    |  |                    |         |                      |   |                       |  |            |          |  |   |        
|Held-to-Maturity                                                    |  |                    |         |                      |   |                       |  |            |          |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                  | 91,527  |                      | $ | 435                   |  | $          | (376)    |  | $ | 91,586 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                    | 85,320  |                      |   | 57                    |  |            | (1,340)  |  |   | 84,037 
|                                                                    |  |                    |         |                      |   |                       |  |            |          |  |   |        
|Total                                                               |  | $                  | 176,847 |                      | $ | 492                   |  | $          | (1,716)  |  | $ | 175,623
|                                                                    |  |                    |         |                      |   |                       |  |            |          |  |   |        
|                                                                    | 
|                                                                    |  | 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
|                                                                    |  |                    |         |                      |   |                       |  |            |          |  |   |        



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The contractual maturities of securities at September 30, 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                                            |  | $                  | 12,644  |                  | $ | 12,645        |  | $          | 7,402   |  | $ | 7,434  
|Due after one year through five years                              |  |                    | 4,755   |                  |   | 4,779         |  |            | 45,166  |  |   | 45,099 
|Due after five years through ten years                             |  |                    | 320     |                  |   | 320           |  |            | 37,007  |  |   | 37,074 
|Due after ten years                                                |  |                    |        |                  |   |              |  |            | 1,952   |  |   | 1,979  
|Mortgage-backed securities and collateralized mortgage obligations |  |                    | 439,854 |                  |   | 434,072       |  |            | 85,320  |  |   | 84,037 
|Other securities                                                   |  |                    | 13,968  |                  |   | 12,973        |  |            |        |  |   |       
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|Total                                                              |  | $                  | 471,541 |                  | $ | 464,789       |  | $          | 176,847 |  | $ | 175,623
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        

There were no securities sold during the three or nine months ended September 30, 2007 and 2006.

Securities with unrealized losses segregated by length of impairment as of September 30, 2007 were as follows (in thousands):



|                                                                    |  |                     |        |                       |   |           |  |               |        |                       |   |            |  |   |         |  |   |        
|------------------------------------------------------------------- |  | ------------------- | ------ | --------------------- | - | --------- |  | ------------- | ------ | --------------------- | - | ---------- |  | - | ------- |  | - | -------
|                                                                    |  | Less than 12 Months |        | More than 12 Months  
|                                                                    |  | AmortizedCost       |        | GrossUnrealizedLosses |   | FairValue |  | AmortizedCost |        | GrossUnrealizedLosses |   | Fair Value
|Available-for-Sale                                                  |  |                     |        |                       |   |           |  |               |        |                       |   |            |  |   |         |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                   | 500    |                       | $ |          |  | $             | 500    |                       | $ | 4,996      |  | $ | (17)    |  | $ | 4,979  
|Obligations of states of the U.S. and political subdivisions        |  |                     |       |                       |   |          |  |               |       |                       |   | 473        |  |   | (2)     |  |   | 471    
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 64,208 |                       |   | (476)     |  |               | 63,732 |                       |   | 270,133    |  |   | (6,079) |  |   | 264,054
|Other securities                                                    |  |                     | 5,051  |                       |   | (568)     |  |               | 4,483  |                       |   | 8,917      |  |   | (427)   |  |   | 8,490  
|                                                                    |  |                     |        |                       |   |           |  |               |        |                       |   |            |  |   |         |  |   |        
|Total                                                               |  | $                   | 69,759 |                       | $ | (1,044)   |  | $             | 68,715 |                       | $ | 284,519    |  | $ | (6,525) |  | $ | 277,994
|                                                                    |  |                     |        |                       |   |           |  |               |        |                       |   |            |  |   |         |  |   |        
|Held-to-Maturity                                                    |  |                     |        |                       |   |           |  |               |        |                       |   |            |  |   |         |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                   | 12,539 |                       | $ | (42)      |  | $             | 12,497 |                       | $ | 19,775     |  | $ | (334)   |  | $ | 19,441 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 39,314 |                       |   | (419)     |  |               | 38,895 |                       |   | 39,071     |  |   | (921)   |  |   | 38,150 
|                                                                    |  |                     |        |                       |   |           |  |               |        |                       |   |            |  |   |         |  |   |        
|Total                                                               |  | $                   | 51,853 |                       | $ | (461)     |  | $             | 51,392 |                       | $ | 58,846     |  | $ | (1,255) |  | $ | 57,591 
|                                                                    |  |                     |        |                       |   |           |  |               |        |                       |   |            |  |   |         |  |   |        

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.

Securities in an unrealized loss position for more than 12 months have an average loss of less than 3% of the amortized cost basis at September 30, 2007. Management believes that these unrealized losses on the Companys securities
portfolio in a loss position for more than 12 months were caused primarily by interest rate increases. Because the decline in market value is attributable to changes in interest rates, not credit quality, and because the Company has the ability
and intent to hold these investments until a recovery of fair value, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at September 30, 2007.



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Securities in a loss position of less than 12 months include an other securities category which is in a loss position of
approximately 11% of amortized cost basis. These investments have declined in value over the last nine months due to increases in interest rates and prepayments. 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 September 30, 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 September 30, 2007.

Securities with carrying values totaling $378 million and fair values totaling $374 million were pledged to secure public deposits at September 30, 2007.



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

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



|                                |  |                    |           |                   |        |        |   |           |  |       
|------------------------------- |  | ------------------ | --------- | ----------------- | ------ | ------ | - | --------- |  | ------
|                                |  | September 30, 2007 |           | December 31, 2006
|                                |  | Amount             |           | %                 |        | Amount |   | %        
|Loans held for sale             |  | $                  | 54,699    |                   | 1.6%   |        | $ | 54,722    |  | 1.7%  
|Loans held for investment       |  |                    |           |                   |        |        |   |           |  |       
|Domestic                        |  |                    |           |                   |        |        |   |           |  |       
|Commercial and industrial       |  |                    | 916,902   |                   | 27.2%  |        |   | 824,494   |  | 26.3% 
|Real estate:                    |  |                    |           |                   |        |        |   |           |  |       
|Commercial                      |  |                    | 1,380,057 |                   | 40.9%  |        |   | 1,336,465 |  | 42.7% 
|Construction                    |  |                    | 697,099   |                   | 20.7%  |        |   | 597,985   |  | 19.1% 
|Residential mortgage            |  |                    | 219,859   |                   | 6.5%   |        |   | 209,163   |  | 6.7%  
|Consumer/other                  |  |                    | 79,370    |                   | 2.4%   |        |   | 79,642    |  | 2.5%  
|Foreign                         |  |                    |           |                   |        |        |   |           |  |       
|Commercial and industrial       |  |                    | 23,920    |                   | 0.6%   |        |   | 27,479    |  | 0.9%  
|Other loans                     |  |                    | 2,445     |                   | 0.1%   |        |   | 2,617     |  | 0.1%  
|                                |  |                    |           |                   |        |        |   |           |  |       
|Total loans held for investment |  |                    | 3,319,652 |                   | 98.4%  |        |   | 3,077,845 |  | 98.3% 
|                                |  |                    |           |                   |        |        |   |           |  |       
|Total loans                     |  | $                  | 3,374,351 |                   | 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 September 30, 2007 were as follows (in thousands):



|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|----------------------------------- |  | ---------------------- | --------- | ---------------------------------- | - | ------------------- |  | ----- | ------- |  | - | ---------
|                                    |  | Due in OneYear or Less |           | Due AfterOne YearThrough FiveYears |   | Due AfterFive Years |  | Total
|Commercial and industrial           |  | $                      | 707,145   |                                    | $ | 178,138             |  | $     | 31,619  |  | $ | 916,902  
|Real estatecommercial              |  |                        | 544,363   |                                    |   | 684,216             |  |       | 151,478 |  |   | 1,380,057
|Real estateconstruction            |  |                        | 495,266   |                                    |   | 142,431             |  |       | 59,402  |  |   | 697,099  
|Foreign loans                       |  |                        | 24,880    |                                    |   | 1,485               |  |       |        |  |   | 26,365   
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|Total                               |  | $                      | 1,771,654 |                                    | $ | 1,006,270           |  | $     | 242,499 |  | $ | 3,020,423
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|                                    |  |                        |           |                                   
|Loans with a fixed interest rate    |  | $                      | 344,921   |                                    | $ | 789,849             |  | $     | 202,214 |  | $ | 1,336,984
|Loans with a floating interest rate |  |                        | 1,426,733 |                                    |   | 216,421             |  |       | 40,285  |  |   | 1,683,439
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|Total                               |  | $                      | 1,771,654 |                                    | $ | 1,006,270           |  | $     | 242,499 |  | $ | 3,020,423
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          

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 September 30, 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



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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. As part of the
Companys ongoing loan portfolio management, $14.4 million of performing commercial real estate loans acquired for investment purposes were transferred to the held for sale classification during 2007. 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 a net gain of $350 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 (the 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):



|                                         |  |                   |       |                  |   |        
|---------------------------------------- |  | ----------------- | ----- | ---------------- | - | -------
|                                         |  | September 30,2007 |       | December 31,2006
|Beginning balance                        |  | $                 | 2,293 |                  | $ | 9,021  
|New loans                                |  |                   | 502   |                  |   |       
|Loans to insiders/directors who resigned |  |                   |      |                  |   | (2,606)
|Repayments                               |  |                   | (848) |                  |   | (4,122)
|                                         |  |                   |       |                  |   |        
|Ending balance                           |  | $                 | 1,947 |                  | $ | 2,293  
|                                         |  |                   |       |                  |   |        

The recorded investment in impaired loans was $11.7 million and $11.4 million at September 30, 2007 and
December 31, 2006, respectively. All impaired loans are categorized as nonaccrual at September 30, 2007 and December 31, 2006. Such impaired loans required an allowance for loan losses of $1.5 million and $1.8 million, respectively.
The average recorded investment in impaired loans for the three and nine months ended September 30, 2007 was $11.7 million and $12.5 million, respectively, and for the three and nine months ended September 30, 2006 was $13.9 million and
$17.5 million, respectively. No interest on impaired loans was received during the three and nine months ended September 30, 2007 and 2006.

Interest
foregone on nonaccrual loans for the nine months ended September 30, 2007 and 2006 was approximately $1.0 million and $1.3 million, respectively. The Company had one restructured loan totaling $772 thousand and $776 thousand as of
September 30, 2007 and December 31, 2006, respectively.

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 $1.5 million and $2.7 million at September 30, 2007 and
December 31, 2006, respectively. These loans consisted primarily of government guaranteed loans.



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

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



|                                                                |  |                                 |        |                                |   |        |  |      |         |  |   |        
|--------------------------------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------- |  | - | -------
|                                                                |  | Three Months EndedSeptember 30, |        | Nine Months EndedSeptember 30,
|                                                                |  | 2007                            |        | 2006                           |   | 2007   |  | 2006
|Allowance for Credit Losses                                     |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Allowance for loan losses at beginning of period                |  | $                               | 33,450 |                                | $ | 31,882 |  | $    | 32,027  |  | $ | 31,230 
|Loans charged-off                                               |  |                                 | 1,070  |                                |   | 1,669  |  |      | 3,811   |  |   | 5,900  
|Loan recoveries                                                 |  |                                 | (995)  |                                |   | (923)  |  |      | (2,293) |  |   | (2,360)
|                                                                |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Net loans charged-off                                           |  |                                 | 75     |                                |   | 746    |  |      | 1,518   |  |   | 3,540  
|Allowance for loan losses associated with acquired institutions |  |                                 |       |                                |   | 2,152  |  |      | 1,496   |  |   | 2,152  
|Provision for loan losses                                       |  |                                 | 850    |                                |   | 858    |  |      | 2,220   |  |   | 4,304  
|                                                                |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Allowance for loan losses at end of period                      |  |                                 | 34,225 |                                |   | 34,146 |  |      | 34,225  |  |   | 34,146 
|                                                                |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Reserve for unfunded loan commitments at beginning of period    |  |                                 | 927    |                                |   | 890    |  |      | 927     |  |   | 1,173  
|Provision for losses on unfunded loan commitments               |  |                                 |       |                                |   | 37     |  |      |        |  |   | (246)  
|                                                                |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Reserve for unfunded loan commitments at end of period          |  |                                 | 927    |                                |   | 927    |  |      | 927     |  |   | 927    
|                                                                |  |                                 |        |                                |   |        |  |      |         |  |   |        
|Total allowance for credit losses                               |  | $                               | 35,152 |                                | $ | 35,073 |  | $    | 35,152  |  | $ | 35,073 
|                                                                |  |                                 |        |                                |   |        |  |      |         |  |   |        



|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 September 30, 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 |  |       |       |  |   | 45,832 
|                                |  |         |        |             |   |        |  |       |        |  |   |        
|Balance, December 31, 2006      |  |         | 29,613 |             |   | 73,037 |  |       | 28,208 |  |   | 130,858
|BOTH, Inc. goodwill adjustments |  |         |       |             |   | 6      |  |       |       |  |   | 6      
|Partners Bank acquisition       |  |         | 30,009 |             |   |       |  |       |       |  |   | 30,009 
|MBM Advisors, Inc. acquisition  |  |         | 5,257  |             |   |        |  |       |        |  |   | 5,257  
|                                |  |         |        |             |   |        |  |       |        |  |   |        
|Balance, September 30, 2007     |  | $       | 64,879 |             | $ | 73,043 |  | $     | 28,208 |  | $ | 166,130
|                                |  |         |        |             |   |        |  |       |        |  |   |        

The changes in the carrying amounts of core deposit and other intangibles for the year ended December 31,
2006, and the period ended September 30, 2007, are as follows (in thousands):



|                               |  |                         |         |                                 |   |       |  |   |        
|------------------------------ |  | ----------------------- | ------- | ------------------------------- | - | ----- |  | - | -------
|                               |  | Core DepositIntangibles |         | CustomerRelationshipIntangibles |   | Total
|Balance, January 1, 2006       |  | $                       | 3,551   |                                 | $ |      |  | $ | 3,551  
|Amortization expense           |  |                         | (1,012) |                                 |   |      |  |   | (1,012)
|BOTH, Inc. acquisition         |  |                         | 7,760   |                                 |   |      |  |   | 7,760  
|                               |  |                         |         |                                 |   |       |  |   |        
|Balance, December 31, 2006     |  |                         | 10,299  |                                 |   |      |  |   | 10,299 
|Amortization expense           |  |                         | (1,454) |                                 |   | (93)  |  |   | (1,547)
|Partners Bank acquisition      |  |                         | 4,087   |                                 |   |      |  |   | 4,087  
|MBM Advisors, Inc. acquisition |  |                         |        |                                 |   | 3,723 |  |   | 3,723  
|                               |  |                         |         |                                 |   |       |  |   |        
|Balance, September 30, 2007    |  | $                       | 12,932  |                                 | $ | 3,630 |  | $ | 16,562 
|                               |  |                         |         |                                 |   |       |  |   |        



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

As of September 30, 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      |  | TrustPreferredSecuritiesOutstanding |        | Interest Rate |                          | JuniorSubordinatedDebt OwedTo Trusts |   | Final Maturity Date
|Statutory Trust One  |  | August 30, 2002    |  | $                                   | 20,000 |               | 3-month LIBOR plus 3.45% |                                      | $ | 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-month LIBOR plus 3.10% |                                      |   | 4,123               |  | July 7, 2033      
|                     |  |                    |  |                                     |       
|Capital Trust IV     |  | March 26, 2007     |  |                                     | 25,000 |               | 3-month LIBOR plus 1.60% |                                      |   | 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 payments of the junior subordinated debentures held by the trust. The common securities of each
trust are wholly-owned by Sterling Bancshares. Each trusts ability to pay amounts due on the trust preferred securities is solely dependent upon Sterling Bancshares making payment on the related junior subordinated debentures. Sterling
Bancshares obligations under the junior subordinated debentures and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by Sterling Bancshares of each respective trusts obligations under the trust
securities issued by each respective trust.

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. The floating rate on these securities was 8.68% at September 30, 2007 and 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 September 30, 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 $25.0 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 a floating interest rate equal to the 3-month LIBOR
plus 1.60% per annum. Trust IV simultaneously issued 774 shares of its common securities to the Company for the purchase price of $774 thousand, which constitutes all of the issued and outstanding common securities of Trust IV. As of
September 30, 2007, the floating rate was 7.29% on these securities.

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



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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 $3.0 million and $3.8 million with a floating rate of 8.98% and 9.00% on September 30, 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 $113.0 million and a strike rate of 8.00% and a prime interest rate collar contract with a notional amount of $250.0 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.

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 $3.8 million at September 30, 2007.
The total fair value of the interest-rate collar and floor was $6.7 million at September 30, 2007 and is included in other assets.



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

The Company adopted the provisions of FIN 48 on
January 1, 2007. There was no effect on the Companys consolidated balance sheet or income statement as a result of implementing FIN 48. As of September 30, 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



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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.

The Companys policy is that it recognizes interest and penalties as a component of income tax expense. As of September 30, 2007, the
Company had accrued interest and penalties of $95 thousand. No interest expense was recognized in the income statement during the third quarter of 2007.

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. During 2005, the Internal Revenue Service commenced an examination of the Companys federal income tax return for the 2003 tax year.
This examination was completed during the third quarter of 2006, resulting in an additional federal income tax obligation of $1.2 million. This obligation was previously accrued as part of the Companys overall tax contingency reserve. During
the third quarter of 2006, the Company revised its estimate to remove contingent liabilities totaling $473 thousand related to the expiration of previous tax contingencies.



|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. On August 31,
2007, the Board of Directors of the Company approved and adopted the Long-Term Incentive Stock Performance Program (the Program) pursuant to which the Human Resource Programs Committee of the Board of Directors (the
Committee) may award equity-based awards to employees who have been designated as an officer of the Company by the Board of Directors of the Company and who are actively employed by the Company. All awards will be made under the 2003
Stock Plan.

Total stock-based compensation expense of $822 thousand was charged against income for the nine month period ended September 30, 2007 and
$1.7 million for the nine month period ended September 30, 2006. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $185 thousand for the nine months ended September 30, 2007 and
$487 thousand for the nine months ended September 30, 2006.

On January 1, 2006, the Company entered into an employment agreement with its chief
executive officer (CEO) in which the CEO was awarded 187,500 Performance Restricted Share Units (PRSUs) to be earned 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 CEO will earn a specific number of the eligible share units. As of September 30, 2007, there was $410 thousand of total unrecognized
compensation expense related to the PRSUs. 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 and nine months ended September 30, 2007, 12,428 and 34,338 shares, respectively, were
subscribed for through payroll deductions under the Purchase Plan compared to 8,939 and 26,870 shares for the same periods in 2006.



16



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

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



|                                        |  |                                 |        |                                |   |        |  |      |        |  |   |       
|--------------------------------------- |  | ------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                                        |  | Three months endedSeptember 30, |        | Nine months endedSeptember 30,
|                                        |  | 2007                            |        | 2006                           |   | 2007   |  | 2006
|Net income                              |  | $                               | 14,579 |                                | $ | 11,729 |  | $    | 39,600 |  | $ | 33,030
|Basic:                                  |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Weighted average shares outstanding     |  |                                 | 73,029 |                                |   | 68,142 |  |      | 72,476 |  |   | 68,095
|Diluted:                                |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Add incremental shares for:             |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Assumed exercise of outstanding options |  |                                 | 424    |                                |   | 776    |  |      | 494    |  |   | 696   
|                                        |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Total                                   |  |                                 | 73,453 |                                |   | 68,918 |  |      | 72,970 |  |   | 68,791
|                                        |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Earnings per share:                     |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Basic                                   |  | $                               | 0.20   |                                | $ | 0.17   |  | $    | 0.55   |  | $ | 0.49  
|                                        |  |                                 |        |                                |   |        |  |      |        |  |   |       
|Diluted                                 |  | $                               | 0.20   |                                | $ | 0.17   |  | $    | 0.54   |  | $ | 0.48  
|                                        |  |                                 |        |                                |   |        |  |      |        |  |   |       

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 373,849 and 339,362 options outstanding for the three and nine months ended September 30, 2007, respectively, and 135,480 and 125,537 options outstanding for the
three and nine month periods ended September 30, 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 $2.4 million and $6.8 million
for the three and nine months ended September 30, 2007, respectively, and $1.4 million and $3.7 million for the three and nine months ended September 30, 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 certain 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. The Company also has an employment
agreement with its CEO, which contains severance and non-competition provisions. Under this employment agreement, upon a termination of employment under certain circumstances, the CEO is assured of compensation through the term of the employment
agreement or for a period of three years, whichever is greater, and would be entitled to certain other severance benefits. All such severance obligations are more thoroughly described in the 2006 proxy statement filed on March 16, 2007.



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



|                             |  |                   |         |                  |   |        
|---------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                             |  | September 30,2007 |         | December 31,2006
|Commitments to extend credit |  | $                 | 944,325 |                  | $ | 822,209
|Standby letters of credit    |  |                   | 116,087 |                  |   | 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 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 September 30, 2007 and December 31, 2006, that Sterling Bancshares and Bank met all capital adequacy requirements to which they are subject. The most recent notification from the regulatory banking
agencies categorized the 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.



18



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##### Table of Contents

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



|                                         |  |                                           |         |                              |       |                                                                              |   |         |  |        |  |       |         |  |      
|---------------------------------------- |  | ----------------------------------------- | ------- | ---------------------------- | ----- | ---------------------------------------------------------------------------- | - | ------- |  | ------ |  | ----- | ------- |  | -----
|                                         |  | Actual                                    |         | For Capital AdequacyPurposes |       | To Be Categorized asWell Capitalized UnderPrompt CorrectiveAction Provisions
|                                         |  | Amount                                    |         | Ratio                        |       | Amount                                                                       |   | Ratio   |  | Amount |  | Ratio
|                                         |  | (In thousands, except percentage amounts)
|CONSOLIDATED:                            |  |                                           |         |                              |       |                                                                              |   |         |  |        |  |       |         |  |      
|As of September 30, 2007:                |  |                                           |         |                              |       |                                                                              |   |         |  |        |  |       |         |  |      
|Total capital (to risk weighted assets)  |  | $                                         | 443,057 |                              | 10.9% |                                                                              | $ | 324,939 |  | 8.0%   |  |       | N/A     |  | N/A  
|Tier 1 capital (to risk weighted assets) |  |                                           | 360,921 |                              | 8.9%  |                                                                              |   | 162,469 |  | 4.0%   |  |       | N/A     |  | N/A  
|Tier 1 capital (to average assets)       |  |                                           | 360,921 |                              | 8.5%  |                                                                              |   | 169,136 |  | 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 September 30, 2007:                |  |                                           |         |                              |       |                                                                              |   |         |  |        |  |       |         |  |      
|Total capital (to risk weighted assets)  |  | $                                         | 438,777 |                              | 10.8% |                                                                              | $ | 324,589 |  | 8.0%   |  | $     | 405,736 |  | 10.0%
|Tier 1 capital (to risk weighted assets) |  |                                           | 356,641 |                              | 8.8%  |                                                                              |   | 162,295 |  | 4.0%   |  |       | 243,442 |  | 6.0% 
|Tier 1 capital (to average assets)       |  |                                           | 356,641 |                              | 8.4%  |                                                                              |   | 168,958 |  | 4.0%   |  |       | 211,197 |  | 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 September 30, 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 five years of their maturity. Under the final transitioned rules, there would not be a material impact on the Companys consolidated capital ratios at
September 30, 2007.

Dividend restrictions Dividends paid by the Bank are subject to certain restrictions imposed by regulatory
agencies. Under these restrictions there was an aggregate of approximately $114.2 million available for payment of dividends at September 30, 2007 by the Bank. At September 30, 2007, the aggregate amount of dividends, which legally could
be paid without prior approval of various regulatory agencies, totaled approximately $33.0 million by the Bank.



|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.



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##### Table of Contents

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 33 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 September 30, 2007, we had consolidated total
assets of $4.4 billion, total loans of $3.4 billion, total deposits of $3.7 billion and shareholders equity of $463 million.

We
reported net income of $14.6 million for the quarter ended September 30, 2007, a 24.3% increase compared to the $11.7 million reported for the third quarter of 2006. Third quarter 2007 earnings were $0.20 per diluted share, up from $0.17 per
diluted share for the same quarter of 2006. Net income for the nine months ended September 30, 2007 was $39.6 million, or $0.54 per diluted share, compared with $33.0 million, or $0.48 per diluted share earned for the same period in 2006.

Our third quarter results are reflective of our efforts to diversify revenue through internal growth and acquisitions while improving asset quality and
implementing a disciplined approach to expense management. Additionally, during the third quarter of 2007, we completed the integration of MBM Advisors which will provide for increased opportunities to serve the owners of small and medium-sized
businesses while enhancing our noninterest income. During the third quarter, we also announced the acquisition of 10 banking centers in the Dallas and Fort Worth areas which will further enhance our ability to serve our customers through an expanded
presence in these markets.

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 September 30, 2007.



20



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##### Table of Contents

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 our 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 statement; however, the Company does not expect it to be material to its financial statements.

In September 2006, the Emerging Issues Task
Force (EITF) of the FASB ratified EITF Issue No. 06-4 Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 provides that an employer should
recognize a liability for future benefits based on the substantive agreement with the employee. The Issue should be applied to fiscal years beginning after December 15, 2007, with earlier application permitted. Management has not completed its
evaluation of this issue; 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 statement;
however, the Company does not expect it to be material to its financial statements.



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##### Table of Contents

SELECTED FINANCIAL DATA



|                                                               |  |                                                             |           |                                |   |                        |  |      |           |      |   |           |  |   |          
|-------------------------------------------------------------- |  | ----------------------------------------------------------- | --------- | ------------------------------ | - | ---------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                               |  | Three Months EndedSeptember 30,                             |           | Nine Months EndedSeptember 30, |   | Year EndedDecember 31,
|                                                               |  | 2007                                                        |           | 2006                           |   | 2007                   |  | 2006 |           | 2006
|                                                               |  | (Dollars and shares in thousands, except per share amounts)
|INCOME STATEMENT DATA:                                         |  |                                                             |           |                                |   |                        |  |      |           |      |   |           |  |   |          
|Net interest income                                            |  | $                                                           | 47,095    |                                | $ | 42,905                 |  | $    | 138,462   |      | $ | 126,410   |  | $ | 171,806  
|Provision for credit losses                                    |  |                                                             | 850       |                                |   | 895                    |  |      | 2,220     |      |   | 4,058     |  |   | 4,058    
|Noninterest income                                             |  |                                                             | 10,633    |                                |   | 7,504                  |  |      | 26,085    |      |   | 23,013    |  |   | 31,217   
|Noninterest expense                                            |  |                                                             | 35,044    |                                |   | 32,567                 |  |      | 103,220   |      |   | 96,718    |  |   | 131,186  
|Income before income taxes                                     |  |                                                             | 21,834    |                                |   | 16,947                 |  |      | 59,107    |      |   | 48,647    |  |   | 67,779   
|Net income                                                     |  |                                                             | 14,579    |                                |   | 11,729                 |  |      | 39,600    |      |   | 33,030    |  |   | 45,840   
|BALANCE SHEET DATA (at period-end):                            |  |                                                             |           |                                |   |                        |  |      |           |      |   |           |  |   |          
|Total assets                                                   |  | $                                                           | 4,440,177 |                                | $ | 4,264,124              |  | $    | 4,440,177 |      | $ | 4,264,124 |  | $ | 4,117,559
|Total loans                                                    |  |                                                             | 3,374,351 |                                |   | 3,103,133              |  |      | 3,374,351 |      |   | 3,103,133 |  |   | 3,132,567
|Allowance for loan losses                                      |  |                                                             | 34,225    |                                |   | 34,146                 |  |      | 34,225    |      |   | 34,146    |  |   | 32,027   
|Total securities                                               |  |                                                             | 641,636   |                                |   | 695,049                |  |      | 641,636   |      |   | 695,049   |  |   | 573,614  
|Total deposits                                                 |  |                                                             | 3,661,763 |                                |   | 3,318,510              |  |      | 3,661,763 |      |   | 3,318,510 |  |   | 3,334,611
|Other borrowed funds                                           |  |                                                             | 136,555   |                                |   | 372,250                |  |      | 136,555   |      |   | 372,250   |  |   | 220,675  
|Subordinated debt                                              |  |                                                             | 46,986    |                                |   | 46,018                 |  |      | 46,986    |      |   | 46,018    |  |   | 46,135   
|Junior subordinated debt                                       |  |                                                             | 82,734    |                                |   | 56,959                 |  |      | 82,734    |      |   | 56,959    |  |   | 56,959   
|Shareholders equity                                           |  |                                                             | 463,035   |                                |   | 399,776                |  |      | 463,035   |      |   | 399,776   |  |   | 409,285  
|COMMON SHARE DATA:                                             |  |                                                             |           |                                |   |                        |  |      |           |      |   |           |  |   |          
|Earnings per share (1)                                         |  |                                                             |           |                                |   |                        |  |      |           |      |   |           |  |   |          
|Basic shares                                                   |  | $                                                           | 0.20      |                                | $ | 0.17                   |  | $    | 0.55      |      | $ | 0.49      |  | $ | 0.67     
|Diluted shares                                                 |  | $                                                           | 0.20      |                                | $ | 0.17                   |  | $    | 0.54      |      | $ | 0.48      |  | $ | 0.66     
|Shares used in computing earnings per common share             |  |                                                             |           |                                |   |                        |  |      |           |      |   |           |  |   |          
|Basic shares                                                   |  |                                                             | 73,029    |                                |   | 68,142                 |  |      | 72,476    |      |   | 68,095    |  |   | 68,834   
|Diluted shares                                                 |  |                                                             | 73,453    |                                |   | 68,918                 |  |      | 72,970    |      |   | 68,791    |  |   | 69,533   
|End of period common shares outstanding                        |  |                                                             | 73,026    |                                |   | 71,089                 |  |      | 73,026    |      |   | 71,089    |  |   | 71,001   
|Book value per common share at period-end                      |  |                                                             |           |                                |   |                        |  |      |           |      |   |           |  |   |          
|Total                                                          |  | $                                                           | 6.34      |                                | $ | 5.62                   |  | $    | 6.34      |      | $ | 5.62      |  | $ | 5.76     
|Tangible                                                       |  | $                                                           | 3.84      |                                | $ | 3.66                   |  | $    | 3.84      |      | $ | 3.66      |  | $ | 3.78     
|Cash dividends paid per common share                           |  | $                                                           | 0.0525    |                                | $ | 0.047                  |  | $    | 0.158     |      | $ | 0.141     |  | $ | 0.186    
|Common stock dividend payout ratio                             |  |                                                             | 26.29%    |                                |   | 27.08%                 |  |      | 28.80%    |      |   | 28.83%    |  |   | 27.99%   
|SELECTED PERFORMANCE RATIOS AND OTHER DATA:                    |  |                                                             |           |                                |   |                        |  |      |           |      |   |           |  |   |          
|Return on average common equity (2)                            |  |                                                             | 12.67%    |                                |   | 13.11%                 |  |      | 11.99%    |      |   | 12.74%    |  |   | 12.66%   
|Return on average assets (2)                                   |  |                                                             | 1.32%     |                                |   | 1.21%                  |  |      | 1.24%     |      |   | 1.17%     |  |   | 1.18%    
|Net interest margin (3)                                        |  |                                                             | 4.74%     |                                |   | 4.89%                  |  |      | 4.82%     |      |   | 4.93%     |  |   | 4.90%    
|Efficiency ratio (4)                                           |  |                                                             | 60.38%    |                                |   | 63.08%                 |  |      | 61.54%    |      |   | 63.59%    |  |   | 63.79%   
|Full-time equivalent employees                                 |  |                                                             | 1,039     |                                |   | 1,068                  |  |      | 1,039     |      |   | 1,068     |  |   | 1,074    
|Number of banking centers                                      |  |                                                             | 49        |                                |   | 45                     |  |      | 49        |      |   | 45        |  |   | 45       
|LIQUIDITY AND CAPITAL RATIOS:                                  |  |                                                             |           |                                |   |                        |  |      |           |      |   |           |  |   |          
|Average loans to average deposits                              |  |                                                             | 90.98%    |                                |   | 97.04%                 |  |      | 91.70%    |      |   | 96.35%    |  |   | 95.85%   
|Period-end shareholders equity to total assets                |  |                                                             | 10.43%    |                                |   | 9.38%                  |  |      | 10.43%    |      |   | 9.38%     |  |   | 9.94%    
|Average shareholders equity to average assets                 |  |                                                             | 10.38%    |                                |   | 9.27%                  |  |      | 10.31%    |      |   | 9.16%     |  |   | 9.33%    
|Period-end tangible capital to total tangible assets           |  |                                                             | 6.58%     |                                |   | 6.30%                  |  |      | 6.58%     |      |   | 6.30%     |  |   | 6.74%    
|Tier 1 capital to risk-weighted assets                         |  |                                                             | 8.89%     |                                |   | 8.53%                  |  |      | 8.89%     |      |   | 8.53%     |  |   | 8.64%    
|Total capital to risk-weighted assets                          |  |                                                             | 10.91%    |                                |   | 10.68%                 |  |      | 10.91%    |      |   | 10.68%    |  |   | 10.72%   
|Tier 1 leverage ratio (Tier 1 capital to average assets)       |  |                                                             | 8.54%     |                                |   | 8.69%                  |  |      | 8.54%     |      |   | 8.69%     |  |   | 8.14%    
|ASSET QUALITY RATIOS:                                          |  |                                                             |           |                                |   |                        |  |      |           |      |   |           |  |   |          
|Period-end allowance for credit losses to period-end loans     |  |                                                             | 1.04%     |                                |   | 1.13%                  |  |      | 1.04%     |      |   | 1.13%     |  |   | 1.05%    
|Period-end allowance for loan losses to period-end loans       |  |                                                             | 1.01%     |                                |   | 1.10%                  |  |      | 1.01%     |      |   | 1.10%     |  |   | 1.02%    
|Period-end allowance for loan losses to nonperforming loans    |  |                                                             | 292.74%   |                                |   | 231.50%                |  |      | 292.74%   |      |   | 231.50%   |  |   | 281.27%  
|Nonperforming assets to period-end loans and foreclosed assets |  |                                                             | 0.43%     |                                |   | 0.54%                  |  |      | 0.43%     |      |   | 0.54%     |  |   | 0.42%    
|Nonperforming loans to period-end loans                        |  |                                                             | 0.35%     |                                |   | 0.48%                  |  |      | 0.35%     |      |   | 0.48%     |  |   | 0.36%    
|Nonperforming assets to period-end assets                      |  |                                                             | 0.33%     |                                |   | 0.39%                  |  |      | 0.33%     |      |   | 0.39%     |  |   | 0.32%    
|Net charge-offs to average loans (2)                           |  |                                                             |          |                                |   | 0.10%                  |  |      | 0.06%     |      |   | 0.17%     |  |   | 0.20%    

---

|(1) | The calculation of diluted EPS excludes 373,849 and 339,362 options outstanding for the three and nine months ended September 30, 2007, 139,025 options for the year ended 2006,
and 135,480 and 125,537 options for the three and nine month periods ended September 30, 2006, respectively, which were antidilutive.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|(3) | Taxable-equivalent basis assuming a 35% tax rate.
|--- | -------------------------------------------------

|(4) | During 2007, the efficiency ratio was changed to divide noninterest expense less acquisition costs, an employee severance payment, and Trust Preferred Securities debt issuance costs
by tax equivalent basis net interest income plus noninterest income less net gain (loss) on sales of investment securities and less net gain on sale/leaseback transactions. Prior period amounts have been restated to reflect the current methodology.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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RESULTS OF OPERATIONS

Net Income  Net income was $14.6 million for the quarter ended September 30, 2007, a 24.3% increase compared to the $11.7 million reported for the third quarter of 2006. Earnings were $0.20 per diluted share for the
third quarter of 2007, up from $0.17 per diluted share for the third quarter of 2006.

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

Net Interest Income  Tax equivalent net interest income increased $4.3 million or 10.0% to $47.4 million for the
three month period ended September 30, 2007 compared to the same time period in 2006. For the nine month period ended September 30, 2007, tax equivalent net interest income was $139.4 million, an increase of $12.3 million or 9.7% compared
to the same period in 2006. Our tax equivalent net interest margin was 4.74% and 4.82% for the three and nine month periods ended September 30, 2007, respectively, compared to 4.89% and 4.93% for the three and nine month periods ended
September 30, 2006, respectively. Changes in the mix and rate paid on interest-earning assets and liabilities influence our net interest income and net interest margin.



23



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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.



|                                                    |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|--------------------------------------------------- |  | -------------------------------- | --------- | -------- | - | ----------------- |  | -------------- |  | -------- | --------- | ----------------- | - | ------ |  | ------
|                                                    |  | Three Months Ended September 30,
|                                                    |  | (Dollars in thousands)          
|                                                    |  | 2007                             |           | 2006    
|                                                    |  | AverageBalance                   |           | Interest |   | AverageYield/Rate |  | AverageBalance |  | Interest |           | AverageYield/Rate
|Interest-Earning Assets:                            |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Loans held for sale (1)                             |  | $                                | 73,295    |          | $ | 1,539             |  | 8.33%          |  | $        | 39,729    |                   | $ | 799    |  | 7.98% 
|Loans held for investment (1):                      |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Taxable                                             |  |                                  | 3,251,368 |          |   | 65,449            |  | 7.99%          |  |          | 2,860,125 |                   |   | 57,323 |  | 7.95% 
|Non-taxable (2)                                     |  |                                  | 3,145     |          |   | 63                |  | 7.93%          |  |          | 2,299     |                   |   | 51     |  | 8.79% 
|Securities:                                         |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Taxable                                             |  |                                  | 531,609   |          |   | 6,111             |  | 4.56%          |  |          | 524,572   |                   |   | 5,902  |  | 4.46% 
|Non-taxable (2)                                     |  |                                  | 92,297    |          |   | 1,159             |  | 4.98%          |  |          | 57,965    |                   |   | 743    |  | 5.09% 
|Trading assets                                      |  |                                  | 8,470     |          |   | 81                |  | 3.77%          |  |          | 6,642     |                   |   | 73     |  | 4.35% 
|Federal funds sold                                  |  |                                  | 4,915     |          |   | 58                |  | 4.69%          |  |          | 4,487     |                   |   | 55     |  | 4.83% 
|Deposits in financial institutions                  |  |                                  | 690       |          |   | 9                 |  | 5.38%          |  |          | 2,965     |                   |   | 34     |  | 4.51% 
|                                                    |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Total interest-earning assets                       |  |                                  | 3,965,789 |          |   | 74,469            |  | 7.45%          |  |          | 3,498,784 |                   |   | 64,980 |  | 7.37% 
|                                                    |  |                                  |           |          |   |                  
|Noninterest-earning assets:                         |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Cash and due from banks                             |  |                                  | 115,923   |          |   |                   |  |                |  |          | 100,986   |                   |   |        |  |       
|Premises and equipment, net                         |  |                                  | 26,810    |          |   |                   |  |                |  |          | 37,104    |                   |   |        |  |       
|Other assets                                        |  |                                  | 323,438   |          |   |                   |  |                |  |          | 225,312   |                   |   |        |  |       
|Allowance for loan losses                           |  |                                  | (33,702)  |          |   |                   |  |                |  |          | (32,132)  |                   |   |        |  |       
|                                                    |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Total noninterest-earning assets                    |  |                                  | 432,469   |          |   |                   |  |                |  |          | 331,270   |                   |   |        |  |       
|                                                    |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Total assets                                        |  | $                                | 4,398,258 |          |   |                   |  |                |  | $        | 3,830,054 |                   |   |        |  |       
|                                                    |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Interest-bearing liabilities:                       |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Deposits:                                           |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Demand and savings                                  |  | $                                | 1,320,136 |          | $ | 8,038             |  | 2.42%          |  | $        | 1,071,169 |                   | $ | 4,971  |  | 1.84% 
|Certificates and other time                         |  |                                  | 1,243,924 |          |   | 14,809            |  | 4.72%          |  |          | 920,615   |                   |   | 9,898  |  | 4.27% 
|Other borrowed funds                                |  |                                  | 104,579   |          |   | 1,369             |  | 5.19%          |  |          | 350,233   |                   |   | 4,690  |  | 5.31% 
|Subordinated debt                                   |  |                                  | 46,078    |          |   | 1,175             |  | 10.12%         |  |          | 44,999    |                   |   | 1,155  |  | 10.18%
|Junior subordinated debt                            |  |                                  | 82,734    |          |   | 1,673             |  | 8.02%          |  |          | 52,925    |                   |   | 1,152  |  | 8.64% 
|                                                    |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Total interest-bearing liabilities                  |  |                                  | 2,797,451 |          |   | 27,064            |  | 3.84%          |  |          | 2,439,941 |                   |   | 21,866 |  | 3.56% 
|                                                    |  |                                  |           |          |   |                  
|Noninterest-bearing sources:                        |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Demand deposits                                     |  |                                  | 1,093,485 |          |   |                   |  |                |  |          | 998,856   |                   |   |        |  |       
|Other liabilities                                   |  |                                  | 50,962    |          |   |                   |  |                |  |          | 36,335    |                   |   |        |  |       
|                                                    |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Total noninterest-bearing liabilities               |  |                                  | 1,144,447 |          |   |                   |  |                |  |          | 1,035,191 |                   |   |        |  |       
|                                                    |  |                                  |           |          |   |                  
|Shareholders equity                                |  |                                  | 456,360   |          |   |                   |  |                |  |          | 354,922   |                   |   |        |  |       
|                                                    |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Total liabilities and shareholders equity          |  | $                                | 4,398,258 |          |   |                   |  |                |  | $        | 3,830,054 |                   |   |        |  |       
|                                                    |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Tax equivalent net interest income & margin (2) (3) |  |                                  |           |          |   | 47,405            |  | 4.74%          |  |          |           |                   |   | 43,114 |  | 4.89% 
|                                                    |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Tax equivalent adjustment:                          |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Loans                                               |  |                                  |           |          |   | 18                |  |                |  |          |           |                   |   | 15     |  |       
|Securities                                          |  |                                  |           |          |   | 292               |  |                |  |          |           |                   |   | 194    |  |       
|                                                    |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Total tax equivalent adjustment                     |  |                                  |           |          |   | 310               |  |                |  |          |           |                   |   | 209    |  |       
|                                                    |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       
|Net interest income                                 |  |                                  |           |          | $ | 47,095            |  |                |  |          |           |                   | $ | 42,905 |  |       
|                                                    |  |                                  |           |          |   |                   |  |                |  |          |           |                   |   |        |  |       

---

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

|(2) | Taxable-equivalent basis assuming a 35% tax rate.
|--- | -------------------------------------------------

|(3) | The net interest margin is equal to net interest income divided by average total interest-earning assets.
|--- | ---------------------------------------------------------------------------------------------------------



24



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##### Table of Contents

|                                                    |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|--------------------------------------------------- |  | ------------------------------- | --------- | -------- | - | ----------------- |  | -------------- |  | -------- | --------- | ----------------- | - | ------- |  | -----
|                                                    |  | Nine Months Ended September 30,
|                                                    |  | (Dollars in thousands)         
|                                                    |  | 2007                            |           | 2006    
|                                                    |  | AverageBalance                  |           | Interest |   | AverageYield/Rate |  | AverageBalance |  | Interest |           | AverageYield/Rate
|Interest-Earning Assets:                            |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Loans held for sale (1)                             |  | $                               | 60,660    |          | $ | 3,646             |  | 8.04%          |  | $        | 19,019    |                   | $ | 1,149   |  | 8.07%
|Loans held for investment (1):                      |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Taxable                                             |  |                                 | 3,182,270 |          |   | 190,081           |  | 7.99%          |  |          | 2,801,457 |                   |   | 162,937 |  | 7.78%
|Non-taxable (2)                                     |  |                                 | 3,456     |          |   | 204               |  | 7.89%          |  |          | 2,402     |                   |   | 163     |  | 9.06%
|Securities:                                         |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Taxable                                             |  |                                 | 512,936   |          |   | 17,327            |  | 4.52%          |  |          | 540,033   |                   |   | 18,062  |  | 4.47%
|Non-taxable (2)                                     |  |                                 | 92,113    |          |   | 3,493             |  | 5.07%          |  |          | 59,071    |                   |   | 2,335   |  | 5.29%
|Trading assets                                      |  |                                 | 2,950     |          |   | 86                |  | 3.88%          |  |          | 14,416    |                   |   | 643     |  | 5.96%
|Federal funds sold                                  |  |                                 | 13,903    |          |   | 480               |  | 4.62%          |  |          | 4,041     |                   |   | 140     |  | 4.63%
|Deposits in financial institutions                  |  |                                 | 919       |          |   | 33                |  | 4.80%          |  |          | 3,649     |                   |   | 124     |  | 4.54%
|                                                    |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Total interest-earning assets                       |  |                                 | 3,869,207 |          |   | 215,350           |  | 7.44%          |  |          | 3,444,088 |                   |   | 185,553 |  | 7.20%
|                                                    |  |                                 |           |          |   |                  
|Noninterest-earning assets:                         |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Cash and due from banks                             |  |                                 | 114,736   |          |   |                   |  |                |  |          | 106,181   |                   |   |         |  |      
|Premises and equipment, net                         |  |                                 | 25,372    |          |   |                   |  |                |  |          | 39,258    |                   |   |         |  |      
|Other assets                                        |  |                                 | 306,656   |          |   |                   |  |                |  |          | 225,246   |                   |   |         |  |      
|Allowance for loan losses                           |  |                                 | (33,051)  |          |   |                   |  |                |  |          | (31,672)  |                   |   |         |  |      
|                                                    |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Total noninterest-earning assets                    |  |                                 | 413,713   |          |   |                   |  |                |  |          | 339,013   |                   |   |         |  |      
|                                                    |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Total assets                                        |  | $                               | 4,282,920 |          |   |                   |  |                |  | $        | 3,783,101 |                   |   |         |  |      
|                                                    |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Interest-bearing liabilities:                       |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Deposits:                                           |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Demand and savings                                  |  | $                               | 1,289,139 |          | $ | 21,682            |  | 2.25%          |  | $        | 1,059,854 |                   | $ | 11,931  |  | 1.51%
|Certificates and other time                         |  |                                 | 1,172,951 |          |   | 41,081            |  | 4.68%          |  |          | 866,890   |                   |   | 25,574  |  | 3.94%
|Other borrowed funds                                |  |                                 | 129,417   |          |   | 5,121             |  | 5.29%          |  |          | 360,462   |                   |   | 13,265  |  | 4.92%
|Subordinated debt                                   |  |                                 | 46,145    |          |   | 3,487             |  | 10.10%         |  |          | 45,264    |                   |   | 3,335   |  | 9.85%
|Junior subordinated debt                            |  |                                 | 74,803    |          |   | 4,562             |  | 8.15%          |  |          | 66,654    |                   |   | 4,353   |  | 8.73%
|                                                    |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Total interest-bearing liabilities                  |  |                                 | 2,712,455 |          |   | 75,933            |  | 3.74%          |  |          | 2,399,124 |                   |   | 58,458  |  | 3.26%
|                                                    |  |                                 |           |          |   |                  
|Noninterest-bearing sources:                        |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Demand deposits                                     |  |                                 | 1,078,037 |          |   |                   |  |                |  |          | 1,002,972 |                   |   |         |  |      
|Other liabilities                                   |  |                                 | 50,951    |          |   |                   |  |                |  |          | 34,292    |                   |   |         |  |      
|                                                    |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Total noninterest-bearing liabilities               |  |                                 | 1,128,988 |          |   |                   |  |                |  |          | 1,037,264 |                   |   |         |  |      
|                                                    |  |                                 |           |          |   |                  
|Shareholders equity                                |  |                                 | 441,477   |          |   |                   |  |                |  |          | 346,713   |                   |   |         |  |      
|                                                    |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Total liabilities and shareholders equity          |  | $                               | 4,282,920 |          |   |                   |  |                |  | $        | 3,783,101 |                   |   |         |  |      
|                                                    |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Tax equivalent net interest income & margin (2) (3) |  |                                 |           |          |   | 139,417           |  | 4.82%          |  |          |           |                   |   | 127,095 |  | 4.93%
|                                                    |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Tax equivalent adjustment:                          |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Loans                                               |  |                                 |           |          |   | 59                |  |                |  |          |           |                   |   | 50      |  |      
|Securities                                          |  |                                 |           |          |   | 896               |  |                |  |          |           |                   |   | 635     |  |      
|                                                    |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Total tax equivalent adjustment                     |  |                                 |           |          |   | 955               |  |                |  |          |           |                   |   | 685     |  |      
|                                                    |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      
|Net interest income                                 |  |                                 |           |          | $ | 138,462           |  |                |  |          |           |                   | $ | 126,410 |  |      
|                                                    |  |                                 |           |          |   |                   |  |                |  |          |           |                   |   |         |  |      

---

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

|(2) | Taxable-equivalent basis assuming a 35% tax rate.
|--- | -------------------------------------------------

|(3) | The net interest margin is equal to net interest income divided by average total interest-earning assets.
|--- | ---------------------------------------------------------------------------------------------------------



25



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##### Table of Contents

Total tax equivalent interest income increased $9.5 million and $29.8 million for the three and nine month periods ended
September 30, 2007, respectively, over the comparable periods in 2006 due to an increase in both the growth and yield earned on the loan portfolio. Average total loans increased $426 million or 14.7% and $424 million or 15.0% for the three and
nine months ended September 30, 2007, respectively, over the comparable periods in 2006. The tax equivalent yield earned on average total loans increased four basis points and 21 basis points for the same time periods. The increase in tax
equivalent yield earned for these periods was due, in part, to an increase in interest rates through June 2006. Beginning in June 2004, the Federal Open Market Committee (FOMC) increased the Fed Funds Target Rate by a total of 425 basis
points to 5.25% at June 30, 2006. The Fed Funds Target Rate remained at 5.25% until September 2007, when it decreased 50 basis points to 4.75%. This recent decrease had little impact on our net interest income during this period.

On average, the securities portfolio (including trading assets) was higher by $43.2 million or 7.3% for the three months ended September 30, 2007 compared to the
same period in 2006. The increase in average securities combined with a nine basis point increase in tax equivalent yield earned on securities for the three month period ended September 30, 2007 resulted in an increase in interest income on
securities of $633 thousand compared to the same time period in 2006. The securities portfolio decreased $5.5 million or 1.0% for the nine month period ended September 30, 2007 compared to the same period in 2006 resulting in a slight decrease
in interest income.

Total interest expense increased $5.2 million and $17.5 million for the three and nine month periods ended September 30, 2007,
respectively, over the comparable periods in 2006. Average interest-bearing liabilities for the three and nine month periods ended September 30, 2007 increased $358 million or 14.7% and $313 million or 13.1%, respectively, compared to the same
periods in 2006. The average rate paid on interest-bearing liabilities increased 28 basis points and 48 basis points for the same time frames.

The
increase in interest-bearing liabilities was primarily due to an increase in average interest-bearing deposits of $572 million for the three month period ended September 30, 2007 and $535 million for the nine month period ended
September 30, 2007, compared to the same periods in 2006. The average rate paid on all interest-bearing deposits increased 58 basis points and 81 basis points for the same time periods due to a change in the deposit mix and an increase in rates
paid on deposit products. During 2007, there was a shift from noninterest-bearing deposits into higher paying money market accounts and certificates of deposit due to a combination of increased competition and the acquisition of BOTH in late 2006.
On average, noninterest-bearing deposits were 30% of total deposits for the nine months ended September 30, 2007 as compared to 33% for the same period in 2006. The increase in average deposit balances and interest rates paid resulted in
additional interest expense of $8.0 million and $25.3 million, respectively, for the three and nine month periods ended September 30, 2007 compared to the same periods in 2006.

The increase in average deposits contributed to a decrease in average other borrowings for the three and nine month periods ended September 30, 2007 of $246 million or 70.1% and $231 million or 64.1%,
respectively, compared to the same periods in 2006. This decrease in average other borrowings resulted in a decrease in interest expense on other borrowings of $3.3 million and $8.1 million for the same time frame. The benefit of the decrease in
other borrowings for the nine month period ended September 30, 2007 over the comparable period in 2006 was partially offset by an increase in rate paid of 37 basis points.

Average junior subordinated debt increased $29.8 million and $8.1 million for the three and nine months ended September 30, 2007, respectively, compared to the same periods in 2006. During the first quarter of
2007, we issued junior subordinated debt of $25.7 million in aggregate principle with an interest rate of 6.95%. Additionally, during the second quarter of 2006, we prepaid $29.6 million of junior subordinated debentures with an interest rate of
9.20%. Overall, these changes resulted in a decrease in rate paid of 62 basis points and 58 basis points for the three and nine month periods ended September 30, 2007 compared to the same periods in 2006.



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##### Table of Contents

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



|                                  |  |                            |        |                           |   |                   |  |                   |        |  |   |       
|--------------------------------- |  | -------------------------- | ------ | ------------------------- | - | ----------------- |  | ----------------- | ------ |  | - | ------
|                                  |  | For the Three Months Ended |        | For the Nine Months Ended
|                                  |  | September 30,2007          |        | September 30,2006         |   | September 30,2007 |  | September 30,2006
|Customer service fees             |  | $                          | 3,629  |                           | $ | 3,398             |  | $                 | 10,532 |  | $ | 9,210 
|Net gain (loss) on trading assets |  |                            | 2      |                           |   |                  |  |                   | 2      |  |   | (302) 
|Net gain on the sale of loans     |  |                            | 1,208  |                           |   | 292               |  |                   | 1,785  |  |   | 802   
|Bank owned life insurance         |  |                            | 796    |                           |   | 813               |  |                   | 2,414  |  |   | 2,257 
|Debit card income                 |  |                            | 596    |                           |   | 501               |  |                   | 1,709  |  |   | 1,455 
|FHLB stock dividends              |  |                            | 92     |                           |   | 239               |  |                   | 509    |  |   | 713   
|Other                             |  |                            | 4,310  |                           |   | 2,261             |  |                   | 9,134  |  |   | 8,878 
|                                  |  |                            |        |                           |   |                   |  |                   |        |  |   |       
|Total                             |  | $                          | 10,633 |                           | $ | 7,504             |  | $                 | 26,085 |  | $ | 23,013
|                                  |  |                            |        |                           |   |                   |  |                   |        |  |   |       

Customer service fees for the three and nine months ended September 30, 2007 increased $231 thousand and $1.3
million, respectively, compared to the same periods in 2006. These increases were due, in part, to the addition of new deposit products and changes in the application of service charges. Additionally, since the third quarter of 2006, we completed
two acquisitions which positively impacted customer service fees for both the three and nine month periods ended September 30, 2007.

Net gain on the
sale of loans increased $916 thousand and $983 thousand for the three and nine month periods ended September 30, 2007, respectively, compared to the same periods in 2006. These increases were due to an increased volume of loan sales in our
capital markets group. During the first quarter of 2007, we sold approximately $20 million of performing commercial real estate loans from the held for investment portfolio as part of our ongoing management of the size, concentration, and risk
profile of the commercial real estate portfolio for a gain of approximately $350 thousand.

Other noninterest income increased $2.0 million for the three
months ended September 30, 2007 compared to the same period in 2006. This increase was primarily due the acquisition of MBM Advisors whose results contributed approximately $1.6 million in noninterest income for the third quarter of 2007. Other
noninterest income increased $256 thousand for the nine months ended September 30, 2007 compared to the same period in 2006. This increase was due to the addition of MBM Advisors noninterest income of approximately $1.6 million partially offset
by a gain of $1.1 million on the sale of a multi-tenant office building that occurred during the second quarter of 2006.

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



|                                                                          |  |                            |        |                           |   |                   |  |                   |         |  |   |       
|------------------------------------------------------------------------- |  | -------------------------- | ------ | ------------------------- | - | ----------------- |  | ----------------- | ------- |  | - | ------
|                                                                          |  | For the Three Months Ended |        | For the Nine Months Ended
|                                                                          |  | September 30,2007          |        | September 30,2006         |   | September 30,2007 |  | September 30,2006
|Salaries and employee benefits                                            |  | $                          | 20,634 |                           | $ | 18,843            |  | $                 | 60,090  |  | $ | 56,340
|Occupancy                                                                 |  |                            | 4,706  |                           |   | 4,018             |  |                   | 13,674  |  |   | 11,922
|Technology                                                                |  |                            | 2,260  |                           |   | 1,695             |  |                   | 6,404   |  |   | 4,784 
|Professional fees                                                         |  |                            | 1,068  |                           |   | 1,408             |  |                   | 3,091   |  |   | 4,306 
|Postage, delivery and supplies                                            |  |                            | 903    |                           |   | 801               |  |                   | 2,657   |  |   | 2,494 
|Marketing                                                                 |  |                            | 432    |                           |   | 675               |  |                   | 1,368   |  |   | 1,768 
|Core deposit and other intangibles amortization                           |  |                            | 610    |                           |   | 195               |  |                   | 1,547   |  |   | 584   
|Acquisition costs                                                         |  |                            |       |                           |   | 638               |  |                   | 920     |  |   | 638   
|Net gains and carrying costs of other real estate and foreclosed property |  |                            | 33     |                           |   | 49                |  |                   | (40)    |  |   | (170) 
|Other                                                                     |  |                            | 4,398  |                           |   | 4,245             |  |                   | 13,509  |  |   | 14,052
|                                                                          |  |                            |        |                           |   |                   |  |                   |         |  |   |       
|Total                                                                     |  | $                          | 35,044 |                           | $ | 32,567            |  | $                 | 103,220 |  | $ | 96,718
|                                                                          |  |                            |        |                           |   |                   |  |                   |         |  |   |       

Total noninterest expense for the three and nine month periods ended September 30, 2007 increased $2.5
million and $6.5 million, respectively, compared to the same periods in 2006. These increases were primarily due to the three acquisitions completed since the third quarter of 2006, which contributed $3.7 million and $8.4 million, respectively, for
the three and nine month periods ended September 30, 2007. Details of the changes in the various components of noninterest expense are discussed below.



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Salaries and employee benefits for the three and nine month periods ended September 30, 2007 increased $1.8 million
and $3.8 million, respectively, compared to the same periods in 2006. These increases were primarily due to the operations of BOTH beginning in the fourth quarter of 2006, Partners Bank beginning in the second quarter of 2007 and MBM Advisors
beginning in the third quarter of 2007 being included in our results. Combined, these acquisitions resulted in additional salaries and benefits of approximately $2.3 million and $5.2 million, respectively, for the three and nine month periods ended
September 30, 2007. In addition, we paid $450 thousand related to an employee severance payment during the second quarter of 2007. Excluding acquisitions, we were able to reduce overall salaries and benefits through our customer focused process
improvement program with particular progress in achieving planned attrition in certain back office departments, continued right-sizing of our front office banking staff, as well as the continued implementation of our disciplined expense management.

Occupancy expense for the three and nine month periods ended September 30, 2007 increased $688 thousand or 17.1% and $1.8 million or 14.7%,
respectively, compared to the same periods 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, since the third quarter of 2006, we added nine banking offices in conjunction with the BOTH and Partners Bank acquisitions.

Technology
expense increased $565 thousand or 33.3% and $1.6 million or 33.9%, respectively, for the three and nine month periods ended September 30, 2007 compared to the same periods in 2006. These increases were primarily due to the three acquisitions
we completed since the third quarter of 2006 which contributed approximately $340 thousand and $830 thousand, respectively, for the three and nine months ended September 30, 2007. In addition, depreciation increased associated with additional
hardware and customer products including an upgrade in the Banks deposit system in 2006 and 2007.

Professional fees decreased $340 thousand or 24.1%
and $1.2 million or 28.2% for the three and nine month periods ended September 30, 2007, respectively, compared to the same periods in 2006, primarily due 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 internal resources and skills necessary to handle these specialized tasks.

Other noninterest expense increased $153 thousand for the three month period ended September 2007 due primarily to the addition of three acquisitions since September 2006 which added additional noninterest expense of
approximately $530 thousand. For the nine month period ended September 30, 2007, other noninterest expense decreased $543 thousand compared to the same period in 2006. During the second quarter of 2006, we prepaid $29.6 million of junior
subordinated debt resulting in the write-off of the remaining unamortized debt issuance costs totaling $1.3 million. The nine month period ended September 30, 2007 includes the operations of three acquisitions which offset the debt issuance
cost write-off in 2006.

Income Taxes  We provided $7.3 million and $19.5 million for federal and state income taxes during the three
and nine month periods ended September 30, 2007, respectively, and $5.2 million and $15.6 million for the same periods of 2006. The effective tax rate was approximately 33% for both the three and nine month periods ended September 30, 2007
as compared to 31% and 32% for the same periods in 2006, respectively. During 2005, the Internal Revenue Service commenced an examination of the Companys federal income tax return for the 2003 tax year. This examination was completed during
the third quarter of 2006, resulting in an additional federal income tax obligation of $1.2 million. This obligation was previously accrued as part of the Companys overall tax contingency reserve. During the third quarter of 2006, the Company
revised its estimate to remove contingent liabilities totaling $473 thousand related to the expiration of previous tax contingencies. We expect our effective tax rate to run at the 33% level for the remainder of 2007.

FINANCIAL CONDITION

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



|                                |  |                    |           |                   |        |        |   |           |  |       
|------------------------------- |  | ------------------ | --------- | ----------------- | ------ | ------ | - | --------- |  | ------
|                                |  | September 30, 2007 |           | December 31, 2006
|                                |  | Amount             |           | %                 |        | Amount |   | %        
|Commercial and industrial       |  | $                  | 916,902   |                   | 27.6%  |        | $ | 824,494   |  | 26.8% 
|Real estate:                    |  |                    |           |                   |        |        |   |           |  |       
|Commercial                      |  |                    | 1,380,057 |                   | 41.6%  |        |   | 1,336,465 |  | 43.4% 
|Construction                    |  |                    | 697,099   |                   | 21.0%  |        |   | 597,985   |  | 19.4% 
|Residential mortgage            |  |                    | 219,859   |                   | 6.6%   |        |   | 209,163   |  | 6.8%  
|Consumer/other                  |  |                    | 79,370    |                   | 2.4%   |        |   | 79,642    |  | 2.6%  
|Foreign loans                   |  |                    | 26,365    |                   | 0.8%   |        |   | 30,096    |  | 1.0%  
|                                |  |                    |           |                   |        |        |   |           |  |       
|Total loans held for investment |  | $                  | 3,319,652 |                   | 100.0% |        | $ | 3,077,845 |  | 100.0%
|                                |  |                    |           |                   |        |        |   |           |  |       



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At September 30, 2007, loans held for investment were $3.3 billion, an increase of $242 million or 7.9% 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. Internal loan growth during 2007 has been partially offset by the sale of approximately $20
million of performing commercial real estate loans from the held for investment portfolio, during the first quarter of 2007, which were sold as part of our ongoing management of the size, concentration, and risk profile of the commercial real estate
loan 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 September 30, 2007, commercial real estate loans and commercial and industrial loans were 41.6% and 27.6%, respectively, of
loans held for investment.

At September 30, 2007, loans held for investment were 90.7% of deposits and 74.8% of total assets. As of
September 30, 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 $54.7 million at September 30, 2007 and 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 loans 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.

Securities Our
securities portfolio at September 30, 2007 totaled $642 million, as compared to $574 million at December 31, 2006, an increase of $68.0 million or 11.9%. The increase in period-end securities was due, in part, to the addition of Partners
Bank with a total securities portfolio of $11.0 million. We plan for minimal near-term growth in the investment portfolio based on the short-term rate cycle and the need to maintain adequate liquidity.

Net unrealized losses on the available-for-sale securities were $6.8 million at September 30, 2007 as compared to $10.2 million at December 31, 2006.
Management believes that the unrealized losses on our 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 September 30, 2007.

Deposits The following table summarizes our deposit portfolio by type (dollars in thousands):



|                                     |  |                    |           |                   |        |        |   |           |  |       
|------------------------------------ |  | ------------------ | --------- | ----------------- | ------ | ------ | - | --------- |  | ------
|                                     |  | September 30, 2007 |           | December 31, 2006
|                                     |  | Amount             |           | %                 |        | Amount |   | %        
|Noninterest-bearing demand           |  | $                  | 1,082,037 |                   | 29.6%  |        | $ | 1,058,135 |  | 31.7% 
|Interest-bearing demand              |  |                    | 1,340,746 |                   | 36.6%  |        |   | 1,229,313 |  | 36.9% 
|Certificates and other time deposits |  |                    |           |                   |        |        |   |           |  |       
|Jumbo                                |  |                    | 773,770   |                   | 21.1%  |        |   | 610,330   |  | 18.3% 
|Regular                              |  |                    | 345,205   |                   | 9.4%   |        |   | 307,419   |  | 9.2%  
|Brokered                             |  |                    | 120,005   |                   | 3.3%   |        |   | 129,414   |  | 3.9%  
|                                     |  |                    |           |                   |        |        |   |           |  |       
|Total deposits                       |  | $                  | 3,661,763 |                   | 100.0% |        | $ | 3,334,611 |  | 100.0%
|                                     |  |                    |           |                   |        |        |   |           |  |       

Total deposits as of September 30, 2007 increased $327 million to $3.7 billion, up 9.8% 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 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 September 30, 2007 was 36.6% and 29.6%, respectively, and our loan to deposit ratio remained at 92.2%.



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Other Borrowed Funds  As of September 30, 2007, we had $137 million in other borrowings compared
to $221 million at December 31, 2006, a decrease of $84.1 million or 38.1%. Our primary source of other borrowings is the Federal Home Loan Bank. At September 30, 2007, borrowings under FHLB advances totaled $110 million with a maturity of
less than 10 days and $500 thousand with a maturity of four years. The weighted average interest rate on these borrowings was 4.72% and 4.22% at September 30, 2007, respectively. 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.

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



|                                                               |  |                   |         |                  |   |        
|-------------------------------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                                               |  | September 30,2007 |         | December 31,2006
|Nonperforming loans:                                           |  |                   |         |                  |   |        
|Nonaccrual                                                     |  | $                 | 10,919  |                  | $ | 10,611 
|Restructured                                                   |  |                   | 772     |                  |   | 776    
|Real estate acquired by foreclosure                            |  |                   | 2,713   |                  |   | 1,465  
|Other repossessed assets                                       |  |                   | 67      |                  |   | 404    
|                                                               |  |                   |         |                  |   |        
|Total nonperforming assets                                     |  | $                 | 14,471  |                  | $ | 13,256 
|                                                               |  |                   |         |                  |   |        
|Potential problem loans                                        |  | $                 | 22,764  |                  | $ | 32,201 
|                                                               |  |                   |         |                  |   |        
|Accruing loans past due 90 days or more                        |  | $                 | 1,477   |                  | $ | 2,731  
|                                                               |  |                   |         |                  |   |        
|Period-end allowance for loan losses to nonperforming loans    |  |                   | 292.74% |                  |   | 281.27%
|Nonperforming loans to period-end loans                        |  |                   | 0.35%   |                  |   | 0.36%  
|Nonperforming assets to period-end assets                      |  |                   | 0.33%   |                  |   | 0.32%  
|Nonperforming assets to period-end loans and foreclosed assets |  |                   | 0.43%   |                  |   | 0.42%  

Nonperforming assets were $14.5 million at September 30, 2007, a $1.2 million increase from December 31,
2006. Accruing loans past due 90 days or more at September 30, 2007 totaled $1.5 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 and nine months ended
September 30, 2007 was $850 thousand and $2.2 million, respectively, as compared to $895 thousand and $4.1 million for the same periods in 2006. The lower provision for credit losses during the three and nine months ended September 30,
2007 is reflective of the favorable improvements in net charge-offs and of



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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 $75 thousand and $1.5 million for the three and nine months ended September 30, 2007, respectively. Net charge-offs decreased $671 thousand
and $2.0 million for the three and nine months ended September 30, 2007, respectively, compared to the same periods in 2006. Net charge-offs to average loans were 0.06% (annualized) for the nine month period ended September 30, 2007
compared to 0.17% for 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 September 30, 2007 was $34.2 million and represented 1.01% of total loans. The allowance for loan losses at September 30, 2007
was 292.74% of nonperforming loans, up from 281.27% at December 31, 2006.

The reserve for unfunded lending commitments remained unchanged at $927
thousand as of September 30, 2007 and December 31, 2006.

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



|                                                                 |  |                                 |         |                                |   |         |  |      |         |  |   |        
|---------------------------------------------------------------- |  | ------------------------------- | ------- | ------------------------------ | - | ------- |  | ---- | ------- |  | - | -------
|                                                                 |  | Three Months EndedSeptember 30, |         | Nine Months EndedSeptember 30,
|                                                                 |  | 2007                            |         | 2006                           |   | 2007    |  | 2006
|Allowance for loan losses at beginning of period                 |  | $                               | 33,450  |                                | $ | 31,882  |  | $    | 32,027  |  | $ | 31,230 
|Charge-offs:                                                     |  |                                 |         |                                |   |         |  |      |         |  |   |        
|Commercial, financial, and industrial                            |  |                                 | 540     |                                |   | 458     |  |      | 2,391   |  |   | 2,879  
|Real estate, mortgage and construction                           |  |                                 | 52      |                                |   | 798     |  |      | 338     |  |   | 2,242  
|Consumer                                                         |  |                                 | 478     |                                |   | 413     |  |      | 1,082   |  |   | 779    
|                                                                 |  |                                 |         |                                |   |         |  |      |         |  |   |        
|Total charge-offs                                                |  |                                 | 1,070   |                                |   | 1,669   |  |      | 3,811   |  |   | 5,900  
|                                                                 |  |                                 |         |                                |   |         |  |      |         |  |   |        
|Recoveries                                                       |  |                                 |         |                                |   |         |  |      |         |  |   |        
|Commercial, financial, and industrial                            |  |                                 | 612     |                                |   | 777     |  |      | 1,559   |  |   | 1,944  
|Real estate, mortgage and construction                           |  |                                 | 3       |                                |   | 3       |  |      | 39      |  |   | 8      
|Consumer                                                         |  |                                 | 380     |                                |   | 143     |  |      | 695     |  |   | 408    
|                                                                 |  |                                 |         |                                |   |         |  |      |         |  |   |        
|Total recoveries                                                 |  |                                 | 995     |                                |   | 923     |  |      | 2,293   |  |   | 2,360  
|                                                                 |  |                                 |         |                                |   |         |  |      |         |  |   |        
|Net charge-offs                                                  |  |                                 | 75      |                                |   | 746     |  |      | 1,518   |  |   | 3,540  
|Allowance for credit losses associated with acquired institution |  |                                 |        |                                |   | 2,152   |  |      | 1,496   |  |   | 2,152  
|Provision for loan losses                                        |  |                                 | 850     |                                |   | 858     |  |      | 2,220   |  |   | 4,304  
|                                                                 |  |                                 |         |                                |   |         |  |      |         |  |   |        
|Allowance for loan losses at end of period                       |  |                                 | 34,225  |                                |   | 34,146  |  |      | 34,225  |  |   | 34,146 
|                                                                 |  |                                 |         |                                |   |         |  |      |         |  |   |        
|                                                                 |  |                                 |         |                               
|Reserve for unfunded loan commitments at beginning of period     |  |                                 | 927     |                                |   | 890     |  |      | 927     |  |   | 1,173  
|Provision for losses on unfunded loan commitments                |  |                                 |        |                                |   | 37      |  |      |        |  |   | (246)  
|                                                                 |  |                                 |         |                                |   |         |  |      |         |  |   |        
|Reserve for unfunded loan commitments at end of period           |  |                                 | 927     |                                |   | 927     |  |      | 927     |  |   | 927    
|                                                                 |  |                                 |         |                                |   |         |  |      |         |  |   |        
|Total allowance for credit losses                                |  | $                               | 35,152  |                                | $ | 35,073  |  | $    | 35,152  |  | $ | 35,073 
|                                                                 |  |                                 |         |                                |   |         |  |      |         |  |   |        
|                                                                 |  |                                 |         |                               
|Period-end allowance for credit losses to period-end loans       |  |                                 | 1.04%   |                                |   | 1.13%   |  |      | 1.04%   |  |   | 1.13%  
|Period-end allowance for loan losses to period-end loans         |  |                                 | 1.01%   |                                |   | 1.10%   |  |      | 1.01%   |  |   | 1.10%  
|Period-end allowance for loan losses to nonperforming loans      |  |                                 | 292.74% |                                |   | 231.50% |  |      | 292.74% |  |   | 231.50%
|Nonperforming assets to period-end loans and foreclosed assets   |  |                                 | 0.43%   |                                |   | 0.54%   |  |      | 0.43%   |  |   | 0.54%  
|Nonperforming loans to period-end loans                          |  |                                 | 0.35%   |                                |   | 0.48%   |  |      | 0.35%   |  |   | 0.48%  
|Nonperforming assets to period-end assets                        |  |                                 | 0.33%   |                                |   | 0.39%   |  |      | 0.33%   |  |   | 0.39%  
|Net charge-offs to average loans (annualized)                    |  |                                 |        |                                |   | 0.10%   |  |      | 0.06%   |  |   | 0.17%  

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.



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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.

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 September 30, 2007 and December 31, 2006:



|                                         |  |                                           
|---------------------------------------- |  | ------------------------------------------
|Changes in Interest Rates (Basis Points) |  | Increase (Decrease) in Net Interest Income
|September 30, 2007                       |  |                                           
|+200                                     |  | 1.97%                                     
|+100                                     |  | 0.97%                                     
|Base                                     |  | 0.00%                                     
|-100                                     |  | -1.92%                                    
|-200                                     |  | -3.98%                                    
|                                         | 
|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 our 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.



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CAPITAL AND LIQUIDITY

Capital  At September 30, 2007, shareholders equity totaled $463 million or 10.43% 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 September 30, 2007 were as follows (dollars in thousands):



|                                         |  |        |         |                                      |       |        |   |         |  |     
|---------------------------------------- |  | ------ | ------- | ------------------------------------ | ----- | ------ | - | ------- |  | ----
|                                         |  | Actual |         | For Minimum CapitalAdequacy Purposes
|                                         |  | Amount |         | Ratio                                |       | Amount |   | Ratio  
|Total capital (to risk weighted assets)  |  | $      | 443,057 |                                      | 10.9% |        | $ | 324,939 |  | 8.0%
|Tier 1 capital (to risk weighted assets) |  |        | 360,921 |                                      | 8.9%  |        |   | 162,469 |  | 4.0%
|Tier 1 capital (to average assets)       |  |        | 360,921 |                                      | 8.5%  |        |   | 169,136 |  | 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 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 September 30, 2007, there was an aggregate of approximately $114.2 million
available for payment of dividends by Sterling Bank. At September 30, 2007, the aggregate amount of dividends, which legally could be paid without prior approval of various regulatory agencies, totaled $33.0 million. It is not anticipated that
such restrictions will have an impact on our ability to meet our 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  We maintain 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 us in the reports that we file, furnish or submit to the Securities and Exchange Commission under the Exchange Act 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 our management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding
required disclosure. We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our
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.



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

PART II. OTHER INFORMATION



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

None.



|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.



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

On
July 30, 2007, the Companys Board of Directors amended its existing common stock repurchase program originally adopted by the Board on April 26, 2005. The amendment increases by 750,000 shares the total number of shares that may be
repurchased by the Company under the Program in the fiscal year 2007. The aggregate number of shares originally approved by the Board for repurchase under the Program remains unchanged at 3,750,000 shares. 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 other borrowings.

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 September 30, 2007:



|                                        |  |                                |  |                                     |       |                                                                    |           |                                                |          
|--------------------------------------- |  | ------------------------------ |  | ----------------------------------- | ----- | ------------------------------------------------------------------ | --------- | ---------------------------------------------- | ---------
|Period                                  |  | Total Number ofSharesPurchased |  | Weighted AveragePrice Paid perShare |       | Total Number of SharesPurchased as Part of PubliclyAnnounced Plans |           | Shares That May Yet BePurchased Under thePlans
|July 1, 2007 to July 31, 2007           |  | 20,800                         |  | $                                   | 11.46 |                                                                    | 1,687,500 |                                                | 2,062,500
|August 1, 2007 to August 31, 2007       |  | 80,000                         |  | $                                   | 10.51 |                                                                    | 1,767,500 |                                                | 1,982,500
|September 1, 2007 to September 30, 2007 |  |                               |  | $                                   |      |                                                                    | 1,767,500 |                                                | 1,982,500



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

None.



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

None.



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

None.



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##### Table of Contents

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



|       |  |                                                                                                                                                                                                                                      
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1    |  | Amendment to Restated and Amended Articles of Incorporation of Sterling Bancshares, Inc., effective August 13, 2007 (incorporated by reference to Exhibit 3.1 of the Companys
Current Report on Form 8-K filed on August 14, 2007). 
|       | 
|10.1   |  | Amended and Restated Sterling Bancshares, Inc. 2003 Stock Incentive and Compensation Plan, effective April 30, 2007 (incorporated by reference to Exhibit 10.1 of the Companys Current
Report on Form 8-K filed on August 14, 2007).
|       | 
|10.2   |  | Sterling Bancshares, Inc. Deferred Compensation Plan (as amended and restated), effective September 1, 2007 (incorporated by reference to Exhibit 4.6 to the Companys Registration
Statement on Form S-8 filed on August 29, 2007). 
|       | 
|10.3   |  | Long-Term Incentive (LTI) Stock Performance Program, effective September 1, 2007 (incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on
September 5, 2007).                                 
|       | 
|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: November 6, 2007 |  |  |  | By:                       |  | /s/ J. Downey Bridgwater                            
|                       |  |  |  |                           |  | J. Downey Bridgwater                                
|                       |  |  |  |                           |  | Chairman, President and Chief Executive
Officer     
|                       |  |  |  |                           |  | (Principal Executive Officer)                       
|                       |  |  | 
|Date: November 6, 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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##### Table of Contents

EXHIBIT INDEX



|        |  |                                                                                                                                                                                                                                      
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                          
|3.1     |  | Amendment to Restated and Amended Articles of Incorporation of Sterling Bancshares, Inc., effective August 13, 2007 (incorporated by reference to Exhibit 3.1 of the Companys Current
Report on Form 8-K filed on August 14, 2007). 
|        | 
|10.1    |  | Amended and Restated Sterling Bancshares, Inc. 2003 Stock Incentive and Compensation Plan, effective April 30, 2007 (incorporated by reference to Exhibit 10.1 of the Companys Current
Report on Form 8-K filed on August 14, 2007).
|        | 
|10.2    |  | Sterling Bancshares, Inc. Deferred Compensation Plan (as amended and restated), effective September 1, 2007 (incorporated by reference to Exhibit 4.6 to the Companys Registration Statement
on Form S-8 filed on August 29, 2007). 
|        | 
|10.3    |  | Long-Term Incentive (LTI) Stock Performance Program, effective September 1, 2007 (incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on September 5,
2007).                                 
|        | 
|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.
|-- | ----------------------



37