<PAGE>
================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   -----------

                                  FORM 10-Q/A
                                AMENDMENT NO. 1
                          -----                -----

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
         For the quarterly period ended June 30, 2003

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
         For the transition period from                  to
                                        ----------------    ----------------

                         Commission File Number: 0-20750

                            STERLING BANCSHARES, INC.
             (Exact name of registrant as specified in its charter)


               TEXAS                                     74-2175590
   (State or other jurisdiction of                    (I.R.S. Employer
    incorporation or organization)                 Identification Number)

   2550 NORTH LOOP WEST, SUITE 600
             HOUSTON, TEXAS                                 77092
(Address of principal executive office)                   (Zip Code)

                                  713-466-8300
              (Registrant's telephone number, including area code)


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 and Exchange Act of 1934
("Act") 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 an accelerated filer (as
defined by Rule 12b-2 of the Act). Yes [X] No [ ]

As of August 7, 2003, there were outstanding 44,184,552 shares of common stock,
par value $1.00 per share, of the registrant.

================================================================================

<PAGE>

                                EXPLANATORY NOTE

The purpose of this Amendment No. 1 to the Quarterly Report on Form 10-Q of
Sterling Bancshares, Inc. (the "Company") for the quarterly period ended June
30, 2003 (the "Original Form 10-Q") is to restate the Company's interim
condensed consolidated financial statements as of and for the quarterly period
ended June 30, 2003 and to revise related disclosures in the Original Form 10-Q.
This restatement is described in detail in Note 10 to the interim condensed
consolidated financial statements. On October 21, 2003, in connection with the
Company's earnings release for the quarter ending September 30, 2003, we issued
a press release that described our intention to restate these interim condensed
consolidated financial statements. We filed the press release as an exhibit to
our Current Report on Form 8-K filed October 21, 2003.

Subsequent to the issuance of our interim condensed consolidated financial
statements as of June 30, 2003 and the filing of the Original Form 10-Q, we
determined that the sales of our banking offices in Eagle Pass, Carrizo Springs,
Crystal City and Pearsall and the financial results and condition pertaining to
these offices should not have been separately reported as discontinued
operations. The Company initially determined that the sales of the banking
offices met the requirements of SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", for presentation as discontinued operations.
However, after further consideration, we have determined that the sales of the
banking offices in Eagle Pass, Carrizo Springs, Crystal City and Pearsall do not
meet such requirements. Net income, basic and diluted earnings per share and
shareholders' equity were not affected by such presentation. As a result of our
determination, we have determined it necessary to amend the Original Form 10-Q
so that the financial results and condition pertaining to these banking offices
are not separately reported as discontinued operations.

This Amendment No. 1 amends and restates in its entirety Part I, Items 1, 2 and
4, and Part II, Item 6 of the Original Form 10-Q. This Amendment No. 1 continues
to reflect circumstances as of the date of the filing of the Original Form 10-Q
and does not reflect events occurring after the filing of the Original Form
10-Q, or modify or update those disclosures in any way, except as required to
reflect the effects of the restatement as described in Note 10 to the interim
condensed consolidated financial statements.


<PAGE>

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                   STERLING BANCSHARES, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)

<Table>
<Caption>
                                                                               JUNE 30,      DECEMBER 31,
                                                                                 2003             2002
                                                                            -------------    -------------
                                                                                      (UNAUDITED)
                                                                                 (AS RESTATED, NOTE 10)
<S>                                                                         <C>              <C>
ASSETS
Cash and cash equivalents                                                   $     156,674    $     147,000
Interest-bearing deposits in financial institutions                                 1,239            1,302
Trading assets                                                                    137,784          142,803
Available-for-sale securities, at fair value                                      225,785          251,165
Held-to-maturity securities, at amortized cost                                     53,473           61,889
Loans held for sale                                                               604,337          701,301
Loans held for investment                                                       2,042,149        1,943,561
Allowance for credit losses                                                       (31,574)         (27,248)
                                                                            -------------    -------------
   Loans held for investment, net                                               2,010,575        1,916,313
Accrued interest receivable                                                        12,125           15,800
Real estate acquired by foreclosure                                                 4,736            3,358
Premises and equipment, net                                                        46,688           51,645
Goodwill, net                                                                      50,354           55,666
Other assets                                                                       99,987          178,444
Assets related to discontinued operations                                          41,409           56,059
                                                                            -------------    -------------
TOTAL ASSETS                                                                $   3,445,166    $   3,582,745
                                                                            =============    =============


LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits:
   Noninterest-bearing                                                      $   1,030,942    $   1,016,818
   Interest-bearing                                                               869,760          919,477
Certificates of deposit and other time deposits                                   693,114          736,777
                                                                            -------------    -------------
   Total deposits                                                               2,593,816        2,673,072
Other borrowed funds                                                              402,800          509,590
Notes payable                                                                      18,694           21,430
Subordinated debt                                                                  49,254               --
Accrued interest payable and other liabilities                                      5,561           16,920
Liabilities related to discontinued operations                                     33,527           32,406
                                                                            -------------    -------------
   Total liabilities                                                            3,103,652        3,253,418

COMPANY-OBLIGATED MANDATORILY REDEEMABLE
   TRUST PREFERRED SECURITIES OF SUBSIDIARY TRUSTS                                 80,000           80,000

Shareholders' equity:
   Convertible preferred stock, $1 par value, 1 million shares authorized              20               59
   Common stock, $1 par value, 100 million shares authorized                       44,159           43,983
   Capital surplus                                                                 45,611           44,633
   Retained earnings                                                              168,576          156,664
   Accumulated other comprehensive income--net unrealized gain on
      available-for-sale securities, net of tax                                     3,148            3,988
                                                                            -------------    -------------
      Total shareholders' equity                                                  261,514          249,327
                                                                            -------------    -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                  $   3,445,166    $   3,582,745
                                                                            =============    =============
</Table>



SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL
PART OF THESE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                       2
<PAGE>

                   STERLING BANCSHARES, INC. AND SUBSIDIARIES
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                      (In thousands, except per share data)

<Table>
<Caption>
                                                                         THREE MONTHS          SIX MONTHS
                                                                         ENDED JUNE 30,       ENDED JUNE 30,
                                                                       2003        2002       2003      2002
                                                                     --------    --------   --------   --------
                                                                                     (UNAUDITED)
                                                                               (AS RESTATED, NOTE 10)
<S>                                                                  <C>         <C>        <C>        <C>
Interest income:
  Loans, including fees                                              $ 41,172    $ 37,137   $ 81,196   $ 71,951
  Securities:
    Taxable                                                             2,201       3,767      4,925      7,650
    Tax-exempt                                                            595         739      1,244      1,520
  Federal funds sold                                                       39         124         86        339
  Trading assets                                                          871         917      1,733      1,967
  Deposits in financial institutions                                       17          30         36         59
                                                                     --------    --------   --------   --------
    Total interest income                                              44,895      42,714     89,220     83,486

Interest expense:
  Demand and savings deposits                                           1,288       2,332      2,749      4,712
  Certificates and other time deposits                                  3,827       4,032      8,053      8,544
  Other borrowed funds                                                  1,578         995      2,926      1,721
  Note payable                                                            155         197        320        400
  Subordinated debt                                                       716          --        716         --
                                                                     --------    --------   --------   --------
    Total interest expense                                              7,564       7,556     14,764     15,377
                                                                     --------    --------   --------   --------
    NET INTEREST INCOME                                                37,331      35,158     74,456     68,109

      Provision for credit losses                                       6,098       3,088     10,548      5,711
                                                                     --------    --------   --------   --------
    NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES              31,233      32,070     63,908     62,398

Noninterest income:
  Customer service fees                                                 3,986       4,150      8,300      8,252
  Net gain on sale of banking offices                                    (142)         --      3,240         --
  Other                                                                 3,195       3,308      6,727      6,059
                                                                     --------    --------   --------   --------
      Total noninterest income                                          7,039       7,458     18,267     14,311

Noninterest expense:
  Salaries and employee benefits                                       16,082      15,562     33,333     30,538
  Occupancy expense                                                     3,960       3,835      7,712      7,512
  Technology                                                            1,229       1,275      2,429      2,432
  Postage and delivery charges                                            522         556      1,119      1,119
  Supplies                                                                332         291        686        648
  Professional fees                                                     1,289       1,250      1,983      1,864
  Minority interest expense:
    Company-obligated mandatorily redeemable trust preferred
    securities of subsidiary trusts                                     1,549       1,325      3,101      2,655
Other                                                                   4,090       3,805      8,333      7,520
                                                                     --------    --------   --------   --------
    Total noninterest expense                                          29,053      27,899     58,696     54,288

    INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES               9,219      11,629     23,479     22,421
      Provision for income taxes                                        3,028       3,709      7,747      7,064
                                                                     --------    --------   --------   --------
    INCOME FROM CONTINUING OPERATIONS                                   6,191       7,920     15,732     15,357

    INCOME (LOSS) FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES     (2,534)      2,459        293      3,921
      Provision (benefit) for income taxes                               (984)        996        147      1,597
                                                                     --------    --------   --------   --------
    INCOME (LOSS) FROM DISCONTINUED OPERATIONS                         (1,550)      1,463        146      2,324
                                                                     --------    --------   --------   --------
    NET INCOME                                                       $  4,641    $  9,383   $ 15,878   $ 17,681
                                                                     ========    ========   ========   ========

EARNINGS PER SHARE:
  Basic                                                              $   0.11    $   0.21   $   0.36   $   0.40
                                                                     ========    ========   ========   ========
  Diluted                                                            $   0.10    $   0.21   $   0.36   $   0.40
                                                                     ========    ========   ========   ========

EARNINGS PER SHARE FROM CONTINUING OPERATIONS:
  Basic                                                              $   0.14    $   0.18   $   0.36   $   0.35
                                                                     ========    ========   ========   ========
  Diluted                                                            $   0.14    $   0.18   $   0.35   $   0.34
                                                                     ========    ========   ========   ========
</Table>


SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL
PART OF THESE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                       3
<PAGE>


                   STERLING BANCSHARES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<Table>
<Caption>
                                                                                              SIX MONTHS ENDED JUNE 30,
                                                                                                2003             2002
                                                                                            -----------       -----------
                                                                                                     (UNAUDITED)
                                                                                               (AS RESTATED, NOTE 10)
<S>                                                                                         <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Income from continuing operations                                                         $    15,732       $    15,357
  Adjustments to reconcile income from continuing operations to net cash
    provided by (used in) operating activities:
      Amortization and accretion of premiums and discounts on securities, net                     3,182                56
      Net gain on the sale of assets                                                               (382)             (100)
      Net gain on the sale of trading assets                                                       (974)             (309)
      Gain on the sale of the Eagle Pass banking office                                          (3,382)               --
      Loss on the sale of the South Texas banking offices                                           142                --
      Provision for credit losses                                                                10,548             5,711
      Write-downs, less gains on sale, of real estate acquired by foreclosure and                  (239)               34
      repossessed assets
      Depreciation and amortization                                                               4,485             4,505
      Net decrease (increase) in loans held for sale                                             96,964          (173,129)
      Net decrease in accrued interest receivable and other assets                               82,131            17,142
      Net decrease in accrued interest payable and other liabilities                            (11,835)             (339)
                                                                                            -----------       -----------
        NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES FROM CONTINUING OPERATIONS          196,372          (131,072)

CASH FLOWS FROM INVESTING ACTIVITIES:
  Net decrease in securities purchased under agreements to resell                                    --             9,514
  Proceeds from maturity and paydowns of held-to-maturity securities                              8,333            10,196
  Proceeds from the sale of available-for-sale securities                                        16,870             6,810
  Proceeds from maturity and paydowns of available-for-sale securities                          100,490            57,294
  Purchases of available-for-sale securities                                                    (95,990)          (53,482)
  Proceeds from the sale of trading assets                                                      259,867           253,491
  Purchases of trading assets                                                                  (255,965)         (237,805)
  Proceeds from principal paydowns of trading securities                                          2,091             5,767
  Net increase in loans held for investment                                                    (140,900)          (98,714)
  Proceeds from sale of real estate acquired by foreclosure                                       3,281               890
  Net decrease in interest-bearing deposits in financial institutions                                63               159
  Proceeds from sale of Eagle Pass banking office                                                 6,952                --
  Cash and cash equivalents sold with the Eagle Pass banking office                             (78,138)               --
  Proceeds from sale of South Texas banking offices                                               1,600                --
  Cash and cash equivalents sold with the South Texas banking offices                           (26,323)               --
  Proceeds from sale of premises and equipment                                                      781             1,307
  Purchase of premises and equipment                                                             (1,770)           (4,488)
                                                                                            -----------       -----------
      NET CASH USED IN INVESTING ACTIVITIES FROM CONTINUING OPERATIONS                         (198,758)          (49,061)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in deposit accounts                                                               58,580            53,556
  Repayment of notes payable                                                                     (2,736)               --
  Issuance of subordinated debt                                                                  49,940                --
  Net decrease (increase) in repurchase agreements/funds purchased                             (106,790)          106,671
  Proceeds from issuance of common stock and preferred stock                                      1,116             1,515
  Dividends paid                                                                                 (3,967)           (3,510)
                                                                                            -----------       -----------
      NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES FROM CONTINUING OPERATIONS             (3,857)          158,232

NET CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS                                           15,917            (3,153)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                              9,674           (25,054)

CASH AND CASH EQUIVALENTS:
  Beginning of period                                                                           147,000           148,295
                                                                                            -----------       -----------
  End of period                                                                             $   156,674       $   123,241
                                                                                            ===========       ===========

SUPPLEMENTAL INFORMATION:
  Income taxes paid                                                                         $    14,489       $     5,800
                                                                                            ===========       ===========
  Interest paid                                                                             $    14,418       $    16,546
                                                                                            ===========       ===========
  Noncash investing and financing activities:
    Acquisitions of real estate through foreclosure of collateral                           $     4,420       $     1,455
                                                                                            ===========       ===========
</Table>



SEE NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS WHICH ARE AN INTEGRAL
PART OF THESE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


                                       4
<PAGE>

                   STERLING BANCSHARES, INC., AND SUBSIDIARIES
          NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 2003
                                   (UNAUDITED)

1.       BASIS OF PRESENTATION

         The accompanying unaudited condensed interim consolidated financial
         statements have been prepared 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 as prescribed by the Securities and Exchange Commission.
         Accordingly, they do not include all of the information and footnotes
         required by generally accepted accounting principles for complete
         financial statements. In the opinion of management, all adjustments
         (consisting of normal recurring items) considered necessary for a fair
         presentation have been included. Operating results for the six-month
         period ended June 30, 2003, are not necessarily indicative of the
         results that may be expected for the entire year or any interim period.
         For further information, refer to the consolidated financial statements
         and notes thereto included in Amendment No. 1 to the Annual Report on
         Form 10-K/A of Sterling Bancshares, Inc. (the "Company") for the year
         ended December 31, 2002. Certain reclassifications have been made to
         prior year amounts to conform to current period presentation, as
         restated. All reclassifications have been applied consistently for the
         periods presented and had no effect on net income or stockholders'
         equity.

2.       EARNINGS PER COMMON SHARE

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

<Table>
<Caption>
                                                    THREE MONTHS ENDED JUNE 30,       SIX MONTHS ENDED JUNE 30,
                                                        2003            2002           2003            2002
                                                    ----------       ----------      ----------      ----------
                                                      AMOUNT           AMOUNT          AMOUNT          AMOUNT
                                                    ----------       ----------      ----------      ----------
<S>                                                 <C>              <C>             <C>             <C>
Income from continuing operations                   $    6,191       $    7,920      $   15,732      $   15,357
  Income (loss) from discontinued operations            (1,550)           1,463             146           2,324
                                                    ----------       ----------      ----------      ----------
Net income                                          $    4,641       $    9,383      $   15,878      $   17,681
                                                    ==========       ==========      ==========      ==========
Basic:
  Weighted average shares outstanding                   44,101           43,849          44,044          43,814
Diluted:
  Add incremental shares for:
    Assumed exercise of outstanding options                622              850             636             828
    Assumed conversion of preferred stock                   21               98              40              89
                                                    ----------       ----------      ----------      ----------
Total                                                   44,744           44,797          44,720          44,731
                                                    ==========       ==========      ==========      ==========

Earnings per share from continuing operations:
  Basic                                             $     0.14       $     0.18      $     0.36      $     0.35
                                                    ==========       ==========      ==========      ==========
  Diluted                                           $     0.14       $     0.18      $     0.35      $     0.34
                                                    ==========       ==========      ==========      ==========
Earnings per share:
  Basic                                             $     0.11       $     0.21      $     0.36      $     0.40
                                                    ==========       ==========      ==========      ==========
  Diluted                                           $     0.10       $     0.21      $     0.36      $     0.40
                                                    ==========       ==========      ==========      ==========
</Table>


                                       5
<PAGE>


3.       SHAREHOLDERS' EQUITY

         The following table displays the changes in shareholders' equity for
         the three-month and six-month periods ended June 30, 2003 and 2002 (in
         thousands):

<Table>
<Caption>
                                                   THREE MONTHS ENDED JUNE 30,                 SIX MONTHS ENDED JUNE 30,
                                                   2003                 2002                  2003                   2002
                                            -----------------    ------------------    --------------------    ------------------
<S>                                         <C>      <C>         <C>       <C>         <C>         <C>         <C>       <C>
Equity, beginning of period                          $258,394              $224,002                $249,327              $217,369
  Comprehensive income:
    Net income                              $4,641               $9,383                $15,878                 $17,681
    Net change in net unrealized gains
      on available-for-sale securities        (558)               1,166                   (840)                    717
                                            ------               ------                -------                 -------
      Total comprehensive income                        4,083                10,549                  15,038                18,398
  Issuance of common stock                              1,022                   978                   1,116                 1,273
  Issuance of preferred stock                              --                    --                      --                   242
  Cash dividends paid                                  (1,985)               (1,757)                 (3,967)               (3,510)
                                                     --------              --------                --------              --------
Equity, end of period                                $261,514              $233,772                $261,514              $233,772
                                                     ========              ========                ========              ========
</Table>

4.       SEGMENTS

         The Company has two reportable operating segments: commercial banking
         and mortgage banking. Sterling Bank (the "Bank") has an 80 percent
         ownership interest in Sterling Capital Mortgage Company ("SCMC") and
         reports its financial position and results of operations on a
         consolidated basis. The commercial banking and mortgage banking
         segments are managed separately because each business requires
         different marketing strategies and each offers different products and
         services. In accordance with a determination made by the Board of
         Directors in the second quarter of 2003 to sell SCMC, the Company
         reported the operations of SCMC as discontinued operations. On July 16,
         2003, the Company and the Bank entered into a definitive agreement with
         RBC Mortgage Company to sell the Bank's 80% indirect interest in SCMC.
         The business related to SCMC is accounted for as discontinued
         operations and therefore, the results of operations and cash flows have
         been removed from the Company's results of continuing operations for
         all periods presented in this document. In addition, the assets and
         liabilities of SCMC are stated separately as discontinued operations.
         Details of SCMC's results of operations are disclosed in footnote 5.

5.       DISCONTINUED OPERATIONS

         On July 16, 2003, the Company and the Bank entered into a definitive
         agreement with RBC Mortgage Company to sell the Bank's 80% indirect
         interest in SCMC. The remaining 20% interest is owned by management and
         employees of SCMC. The gross proceeds to the Company are estimated to
         be approximately $83 million at closing. Net of tax and transaction
         costs, the Company expects to realize net cash proceeds of
         approximately $49 million. The sale consists of all of the stock of
         SCMC. In addition, effective July 16, 2003, the Bank purchased from
         SCMC its mortgage servicing portfolio of $15.5 million at June 30,
         2003. The purchase price paid by the Bank for the mortgage servicing
         portfolio was approximately $15.5 million. It is anticipated that the
         Bank, in a separate transaction, will sell the mortgage servicing
         portfolio to a third party prior to the consummation of the sale of
         SCMC.


                                       6
<PAGE>


         The business related to SCMC is accounted for as discontinued
         operations and therefore, the results of operations and cash flows have
         been removed from the Company's results of continuing operations for
         all periods presented in this document. The results of SCMC are
         presented as discontinued operations in a separate category on the
         income statement following results from continuing operations. The
         income from discontinued operations for the six months ended June 30,
         2003 and 2002, respectively, is as follows (in thousands):

<Table>
<Caption>
                                                                 SIX MONTHS ENDED
                                                             -----------------------
                                                               2003           2002
                                                             --------       --------
<S>                                                          <C>            <C>
Net interest income (loss) after
  provision for credit losses                                $ (3,708)      $     --

Noninterest income:
  Gain on sale of mortgage loans                               25,384         11,670
  Mortgage origination income                                  17,595          9,006
  Other                                                         5,175          4,384
                                                             --------       --------
      Total noninterest income                                 48,154         25,060

Noninterest expense:
  Salaries and employee benefits                               16,141         11,775
  Occupancy expense                                             6,064          3,460
  Mortgage servicing rights amortization and impairment        15,460          1,842
  Technology                                                      579            121
  Postage and delivery charges                                    833            407
  Supplies                                                        925            579
  Professional fees                                               432            182
  Minority interest expense:
    Sterling Capital Mortgage Company                              37            581
Other                                                           3,682          2,192
                                                             --------       --------
      Total noninterest expense                                44,153         21,139

      Income from discontinued operations
        before income taxes                                       293          3,921
        Provision for income taxes                                147          1,597
                                                             --------       --------
      Income from discontinued operations                    $    146       $  2,324
                                                             ========       ========
</Table>

         The assets and liabilities of SCMC are stated separately as
         discontinued operations as of June 30, 2003 and December 31, 2002 on
         the Consolidated Balance Sheet. The major asset and liability
         categories of discontinued operations are as follows (in thousands):

<Table>
<Caption>
                                                              JUNE 30,       DECEMBER 31,
                                                                2003             2002
                                                            -----------      -----------
                                                            (UNAUDITED)      (UNAUDITED)
<S>                                                         <C>              <C>
Premises and equipment, net                                 $     7,042      $     5,059
Mortgage servicing rights                                        15,480           26,467
Goodwill, net                                                     6,202            5,618
Other assets                                                     12,685           18,915
                                                            -----------      -----------
Assets related to discontinued operations                   $    41,409      $    56,059
                                                            ===========      ===========

Other liabilities                                           $    28,417      $    27,332
Minority interest in Sterling Capital Mortgage Company            5,110            5,074
                                                            -----------      -----------
Liabilities related to discontinued operations              $    33,527      $    32,406
                                                            ===========      ===========
</Table>


                                       7
<PAGE>

6.       DISPOSITIONS OF BANKING OFFICES

         On October 29, 2002, the Bank entered into an agreement to sell its
         banking office located in Eagle Pass, Texas. On March 20, 2003, the
         Bank completed the sale of its banking office located in Eagle Pass,
         Texas to South Texas National Bank of Laredo. Assets of $18.7 million,
         loans of $16.8 million and deposits of $95.7 million were sold in the
         transaction. A before-tax gain of $3.4 million related to the sale
         of the Eagle Pass banking office was recorded in the first quarter of
         2003.

         On July 16, 2002, the Bank entered into an agreement to sell its
         banking offices located in Carrizo Springs, Crystal City and Pearsall
         to an investor group headed by the current executive officers of these
         three locations. The sale of these three banking offices was completed
         on May 8, 2003. Assets of $16.6 million, loans of $15.2 million and
         deposits of $42.1 million were sold in the transaction. A before-tax
         loss of $142 thousand was recorded on the sale during the second
         quarter of 2003.

7.       STOCK OPTIONS

         The Company accounts for its employee stock options using the intrinsic
         value-based method. If the compensation cost for the Company's
         stock-based compensation plan had been determined based on the fair
         value at the grant dates for awards, there would have been no material
         impact on the Company's reported net income or earnings per share. Pro
         forma information regarding net income and earnings per share is
         required under Statement of Financial Accounting Standard No. 123
         ("SFAS 123"), "Accounting for Stock-Based Compensation" and has been
         determined as if the Company accounted for its employee stock option
         plans under the fair value method of SFAS 123. The fair value of
         options was estimated using a Black-Scholes option pricing model.
         Option valuation models require use of highly subjective assumptions.
         Also, employee stock options have characteristics that are
         significantly different from those of traded options, including vesting
         provisions and trading limitations that impact their liquidity.

         The following table shows information related to stock-based
         compensation in both the reported and pro forma earnings per share
         amounts (dollars in thousands except for per shares):


<Table>
<Caption>
                                                       THREE MONTHS ENDED JUNE 30,          SIX MONTHS ENDED JUNE 30,
                                                           2003             2002              2003             2002
                                                      ------------      ------------      ------------      ------------
<S>                                                   <C>               <C>               <C>               <C>
Net income, as reported                               $      4,641      $      9,383      $     15,878      $     17,681

Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects                             224               261               483               521

                                                      ------------      ------------      ------------      ------------
Pro Forma net income                                  $      4,417      $      9,122      $     15,395      $     17,160
                                                      ============      ============      ============      ============

Earnings per share:
    Basic - as reported                               $       0.11      $       0.21      $       0.36      $       0.40
                                                      ============      ============      ============      ============
    Basic - pro forma                                 $       0.10      $       0.21      $       0.35      $       0.39
                                                      ============      ============      ============      ============

    Diluted - as reported                             $       0.10      $       0.21      $       0.36      $       0.40
                                                      ============      ============      ============      ============
    Diluted - pro forma                               $       0.10      $       0.20      $       0.34      $       0.38
                                                      ============      ============      ============      ============
</Table>


                                       8
<PAGE>

8.       INTANGIBLE ASSETS AND GOODWILL

         The changes in the carrying amount of goodwill for the year ended
         December 31, 2002 and the six months ended June 30, 2003 are as follows
         (in thousands):

<Table>
<Caption>
(Unaudited)                                                                      SOUTH
                                   HOUSTON       SAN ANTONIO      DALLAS         TEXAS            TOTAL
                                 -----------     -----------    -----------    -----------     -----------
<S>                              <C>             <C>            <C>            <C>             <C>
Balance, January 1, 2002         $    29,641     $    15,079    $        --    $     5,312     $    50,032
  Purchase price adjustment              (28)             --             --             --             (28)
  Eagle National acquisition              --              --          5,662             --           5,662
                                 -----------     -----------    -----------    -----------     -----------
Balance, December 31, 2002            29,613          15,079          5,662          5,312          55,666
  Sale of Eagle Pass office               --              --             --         (3,570)         (3,570)
  Sale of South Texas offices             --              --             --         (1,742)         (1,742)
                                 -----------     -----------    -----------    -----------     -----------
Balance, June 30, 2003           $    29,613     $    15,079    $     5,662    $        --     $    50,354
                                 ===========     ===========    ===========    ===========     ===========
</Table>


         The changes in the carrying amounts of intangible assets other than
         goodwill for the year ended December 31, 2002 and six months ended June
         30, 2003 are as follows (in thousands):

<Table>
<Caption>
                                         CORE
(Unaudited)                            DEPOSIT
                                     INTANGIBLE
                                     ----------
<S>                                  <C>
Balance, January 1, 2002             $    2,036
  Amortization                             (426)
  Eagle National acquisition               486
                                     ----------
Balance, December 31, 2002                2,096
  Amortization                             (228)
                                     ----------
Balance, June 30, 2003               $    1,868
                                     ==========
</Table>


9.       RECENT ACCOUNTING PRONOUNCEMENTS

         On January 17, 2003, the Financial Accounting Standards Board ("FASB")
         issued FASB Interpretation No. 46 ("FIN 46") "Consolidation of Variable
         Interest Entities", which addresses consolidation by business
         enterprises of variable interest entities. FIN No. 46 clarifies the
         application of Accounting Research Bulletin No. 51, "Consolidated
         Financial Statements", to certain entities in which equity investors do
         not have the characteristics of a controlling financial interest or do
         not have sufficient equity at risk for the entity to finance its
         activities without additional subordinated financial support from other
         parties. FIN No. 46 applies immediately to variable interest entities
         created after January 31, 2003, and to variable interest entities in
         which an enterprise obtains an interest after that date. It applies in
         the first fiscal year or interim period beginning after June 15, 2003,
         to variable interest entities in which an enterprise holds a variable
         interest that it acquired before February 1, 2003. In its current form,
         FIN 46 may require the Corporation to de-consolidate its investment in
         Sterling Bancshares Capital Trust II ("Capital Trust II"), Sterling
         Bancshares Capital Trust III ("Capital Trust III") and Sterling
         Bancshares Statutory Trust One ("Statutory Trust One"). The potential
         de-consolidation of subsidiary trusts of bank holding companies formed
         in connection with the issuance of trust preferred securities, such as
         Capital Trust I, Capital Trust II and Statutory Trust One, appears to
         be an unintended consequence of FIN 46. It is currently unknown if, or
         when, the FASB will address this issue. In July 2003, the Board of
         Governors of the Federal Reserve System issued a supervisory letter
         instructing bank holding companies to continue to include the trust
         preferred securities in their Tier 1 capital for regulatory capital
         purposes until notice is given to the contrary. The Federal Reserve
         intends to review the regulatory implications of any accounting
         treatment changes and, if necessary or warranted, provide further
         appropriate guidance. There can be no assurance that the Federal
         Reserve will continue to allow institutions to include trust preferred
         securities in Tier 1 capital for regulatory capital purposes. If the
         trust preferred securities were no longer allowed to be included in
         Tier 1 capital, the Company would, subject to the conditions applicable
         thereto, also be permitted to redeem the trust preferred securities.


                                       9
<PAGE>


         In April 2003, FASB issued Statement No. 149, "Amendment of Statement
         133 on Derivative Instruments and Hedging Activities" ("SFAS 149").
         SFAS 149 amends and clarifies financial accounting and reporting for
         derivative instruments, including certain derivative instruments
         embedded in other contracts and for hedging activities under FASB
         Statement No. 133, Accounting for Derivative Instruments and Hedging
         Activities. The amendments (i) reflect decisions of the Derivatives
         Implementation Group process that effectively required amendments to
         SFAS 133, (ii) reflect decisions made by the Financial Accounting
         Standards Board in connection with other board projects dealing with
         financial instruments, and (iii) address implementation issues related
         to the application of the definition of a derivative. SFAS 149 is
         effective for contracts entered into or modified after June 30, 2003,
         and for hedging relationships designated after June 30, 2003, with all
         provisions applied prospectively. The Company does not believe the
         adoptions of SFAS 149 will have a significant impact on its financial
         statements.

         In May 2003, FASB issued FASB Statement No. 150, "Accounting for
         Certain Financial Instruments with Characteristics of both Liabilities
         and Equity" ("SFAS 150"). SFAS 150 establishes standards for how an
         issuer classifies, measures and discloses in its financial statements
         certain financial instruments with characteristics of both liabilities
         and equity. SFAS 150 requires that an issuer classify financial
         instruments that are within its scope as liabilities, in some
         circumstances. Such financial instruments include (i) financial
         instruments that are issued in the form of shares that are mandatorily
         redeemable; (ii) financial instruments that embody an obligation to
         repurchase the issuer's equity shares, or are indexed to such an
         obligation, and that require the issuer to settle the obligation by
         transferring assets; (iii) financial instruments that embody an
         obligation to repurchase the issuer's equity shares if, at inception,
         the monetary value of the obligation is predominantly based on a fixed
         amount, variations in something other than the fair value of the
         issuer's equity shares or variations inversely related to changes in
         the fair value of the issuer's equity shares; and (iv) certain free
         standing financial instruments. SFAS 150 is effective for contracts
         entered into or modified after May 31 2003, and is otherwise effective
         at the beginning of the first interim period beginning after June 15,
         2003. The adoption of SFAS 150 did not have a significant impact on the
         Company's financial statements.

10.      RESTATEMENT

         Subsequent to the filing of Form 10-Q for the quarter ended June 30,
         2003, the Company determined that the sales of its banking offices in
         Eagle Pass, Carrizo Springs, Crystal City and Pearsall and the
         financial results and condition pertaining to these offices should not
         have been reported as discontinued operations. The Company initially
         determined that the sales of the banking offices met the requirements
         in SFAS No. 144, "Accounting for the Impairment or Disposal of
         Long-Lived Assets", for presentation as discontinued operations.
         However after further consideration, we have determined that the sales
         of the banking offices in Eagle Pass, Carrizo Springs, Crystal City and
         Pearsall do not meet such requirements. Net income, basic and diluted
         earnings per share and shareholders' equity were not affected by such
         presentation. The Company determined that it was necessary to amend the
         Quarterly Reports on Form 10-Q for the quarterly periods ending March
         31, 2003 and June 30, 2003 and the Annual Report on Form 10-K for the
         year ended 2002 so that the financial results and condition pertaining
         to these banking offices are not separately reported as discontinued
         operations.


                                       10
<PAGE>


         The following table shows the effect of the restatement on the interim
         condensed consolidated balance sheet as previously reported in the
         Quarterly Report on Form 10-Q for the quarter ended June 30, 2003:


<Table>
<Caption>
                                                           DECEMBER 31, 2002
                                                   ------------------------------
                                                         AS         AS PREVIOUSLY
                                                      RESTATED         REPORTED
                                                   -------------    -------------
<S>                                                <C>              <C>
Cash and cash equivalents                          $     147,000    $     139,209
Loans held for investment                              1,943,561        1,910,565
Accrued interest receivable                               15,800           15,637
Premises and equipment, net                               51,645           49,860
Other assets                                             178,444          178,407
Assets related to discontinued operations                 56,059           98,831

Demand deposits:
    Noninterest-bearing                            $   1,016,818    $     991,271
    Interest-bearing                                     919,477          867,942
Certificates of deposit and other time deposits          736,777          673,689
                                                   -------------    -------------
    Total deposits                                     2,673,072        2,532,902
Accrued interest payable and other liabilities            16,920           16,750
Liabilities related to discontinued operations           32,406          172,746
</Table>


         The following table shows the effect of the restatement on the interim
         condensed consolidated income statements for the three months ended
         June 30, 2002 and 2003 as previously reported in the Quarterly Report
         on Form 10-Q for the quarter ended June 30, 2003:

<Table>
<Caption>
                                                                FOR THE THREE MONTHS               FOR THE THREE MONTHS
                                                                ENDED JUNE 30, 2003                 ENDED JUNE 30, 2002
                                                         -------------------------------     ------------------------------
                                                              AS           AS PREVIOUSLY           AS         AS PREVIOUSLY
                                                           RESTATED           REPORTED          RESTATED         REPORTED
                                                         -------------     -------------     -------------    -------------
<S>                                                      <C>               <C>               <C>              <C>
Interest income:
  Loans, including fees                                  $      41,172     $      41,053     $      37,137    $      36,515
Interest expense:
  Demand deposits and savings deposits                           1,288             1,264             2,332            2,176
  Certificates and other time deposits                           3,827             3,807             4,032            3,677
Noninterest income:
  Customer service fees                                          3,986             3,908             4,150            3,749
  Other noninterest income                                       3,053             3,179             3,308            3,187
Noninterest expense:
  Salaries and employee benefits                                16,082            15,998            15,562           15,116
  Occupancy expense                                              3,960             3,931             3,835            3,739
  Technology                                                     1,229             1,229             1,275            1,265
  Postage and delivery charges                                     522               515               556              528
  Supplies                                                         332               328               291              277
  Professional fees                                              1,289             1,286             1,250            1,237
  Other noninterest expense                                      4,090             4,136             3,805            3,724
Income from continuing operations before income taxes            9,219             9,273            11,629           11,684
  Provision for income taxes                                     3,028             3,047             3,709            3,727
Income from continuing operations                                6,191             6,226             7,920            7,957
Income (loss) from discontinued operations
  before income taxes                                           (2,534)           (2,588)            2,459            2,404
  Provision (benefit) for income taxes                            (984)           (1,003)              996              978
Income (loss) from discontinued operations                      (1,550)           (1,585)            1,463            1,426

EARNINGS PER SHARE FROM CONTINUING OPERATIONS:
  Basic                                                  $        0.14     $        0.14     $        0.18    $        0.18
  Diluted                                                $        0.14     $        0.14     $        0.18    $        0.18
</Table>


                                       11
<PAGE>

         The following table shows the effect of the restatement on the interim
         condensed consolidated income statements for the six months ended June
         30, 2002 and 2003 as previously reported in the Quarterly Report on
         Form 10-Q for the quarter ended June 30, 2003:

<Table>
<Caption>
                                                               FOR THE SIX MONTHS             FOR THE SIX MONTHS
                                                              ENDED JUNE 30, 2003            ENDED JUNE 30, 2002
                                                        -----------------------------   -----------------------------
                                                              AS        AS PREVIOUSLY        AS         AS PREVIOUSLY
                                                           RESTATED        REPORTED        RESTATED        REPORTED
                                                        -------------   -------------   -------------   -------------
<S>                                                     <C>             <C>             <C>             <C>
Interest income:
  Loans, including fees                                 $      81,196   $      80,533   $      71,951   $      70,712
Interest expense:
  Demand deposits and savings deposits                          2,749           2,621           4,712           4,384
  Certificates and other time deposits                          8,053           7,739           8,544           7,797
Noninterest income:
  Customer service fees                                         8,300           7,871           8,252           7,418
  Other noninterest income                                      9,967           6,618           6,059           5,833
Noninterest expense:
  Salaries and employee benefits                               33,333          32,810          30,538          29,668
  Occupancy expense                                             7,712           7,602           7,512           7,323
  Technology                                                    2,429           2,421           2,432           2,409
  Postage and delivery charges                                  1,119           1,081           1,119           1,059
  Supplies                                                        686             660             648             618
  Professional fees                                             1,983           1,980           1,864           1,838
  Other noninterest expenses                                    8,333           8,106           7,520           7,351
Income from continuing operations before income taxes          23,479          20,415          22,421          22,564
  Provision for income taxes                                    7,747           6,675           7,064           7,111
Income from continuing operations                              15,732          13,740          15,357          15,453
Income (loss) from discontinued operations
  before income taxes                                             293           3,357           3,921           3,778
  Provision (benefit) for income taxes                            147           1,219           1,597           1,550
Income (loss) from discontinued operations                        146           2,138           2,324           2,228

EARNINGS PER SHARE FROM CONTINUING OPERATIONS:
  Basic                                                 $        0.36   $        0.31   $        0.35   $        0.35
  Diluted                                               $        0.35   $        0.31   $        0.34   $        0.35
</Table>


         The following table shows the effect of the restatement on the interim
         condensed consolidated statements of cash flows as previously reported
         in the Quarterly Report on Form 10-Q for the quarter ended June 30,
         2003 :

<Table>
<Caption>
                                                                       FOR THE SIX MONTHS               FOR THE SIX MONTHS
                                                                      ENDED JUNE 30, 2003              ENDED JUNE 30, 2002
                                                                ------------------------------    ------------------------------
                                                                     AS          AS PREVIOUSLY         AS          AS PREVIOUSLY
CASH FLOWS FROM OPERATING ACTIVITIES:                              RESTATED         REPORTED        RESTATED          REPORTED
                                                                -------------    -------------    -------------    -------------
<S>                                                             <C>              <C>              <C>              <C>
  Income from continuing operations                             $      15,732    $      13,740    $      15,357    $      15,453
  Adjustments to reconcile income from continuing
    operations to net cash provided by (used in)
    operating activities:
      Gain on the sale of the Eagle Pass banking office                (3,382)              --               --               --
      Loss on the sale of the South Texas banking offices                 142               --               --               --
      Depreciation and amortization                                     4,485            4,440            4,505            4,460
      Net decrease in accrued interest payable and other
        liabilities                                                   (11,835)         (11,876)            (339)            (305)

CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from sale of Eagle Pass banking office                       6,952               --               --               --
  Cash and cash equivalents sold with the Eagle Pass banking
    office                                                            (78,138)              --               --               --

  Proceeds from sale of South Texas banking offices                     1,600               --               --               --
  Cash and cash equivalents sold with the South Texas banking
    offices                                                           (26,323)              --               --               --
  Proceeds from sale of premises and equipment                            781              731            1,307            1,307
  Purchase of premises and equipment                                   (1,770)          (1,770)          (4,488)          (4,154)

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in deposit accounts                                     58,580           60,914           53,556           53,194
NET CASH USED IN DISCONTINUED OPERATIONS                               15,917          (79,659)          (3,153)          (2,008)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                    9,674           17,465          (25,054)         (24,675)
CASH AND CASH EQUIVALENTS:
  Beginning of period                                                 147,000          139,209          148,295          141,399
  End of period                                                       156,674          156,674          123,241          116,724
</Table>



                                       12
<PAGE>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following "Management's Discussion and Analysis of Financial Condition and
Results of Operation" reflects certain restatements to the Company's previously
reported interim condensed consolidated financial statements for the period
ended June 30, 2003. (See "Restatement of Financial Statements" below).

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q/A, including Management's Discussion and
Analysis of Financial Condition and Results of Operations, contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements discuss future
expectations, activities or events and by their nature, they are subject to
risks and uncertainties. Forward-looking statements can be identified by the
fact that they do not relate strictly to historical or current facts. They often
include words such as "believe," "expect," "anticipate," "intend," "plan,"
"estimate," or words of similar meaning, or future or conditional verbs such as
"will," "would," "should," "could," or "may." Forward-looking statements speak
only as of the date they are made. The Company will not update these
forward-looking statements to reflect circumstances or events that occur after
the date the forward-looking statements are made.

Many possible factors could affect the Company's future financial performance
and actual results may differ materially from what is expressed in any
forward-looking statement. Important factors that could cause actual results to
differ materially from estimates or projections contained in forward-looking
statements include, but are not limited to, the following: general business and
economic conditions in the markets the Company serves 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; the Company's liquidity requirements
could be adversely affected by changes in its assets and liabilities;
legislative or regulatory developments including changes in laws concerning
taxes, banking, securities, insurance and other aspects of the financial
securities industry; competitive factors, including product and pricing
pressures among financial services organizations, may increase; and changes in
fiscal and governmental policies of the United States federal government could
have an adverse effect on the Company's business. For additional discussion of
such risks, uncertainties and assumptions, see the Company's Amendment No. 1 to
the Annual Report on Form 10-K/A for the year ended December 31, 2002, filed
with the Securities and Exchange Commission under the Securities Exchange Act of
1934.

CRITICAL ACCOUNTING POLICIES

The Company's accounting policies are integral to understanding the results
reported. Accounting policies are described in detail in Note A to the
consolidated financial statements in the 2002 Annual Report. The Company
believes that of its significant accounting policies, the allowance for credit
losses may involve a higher degree of judgment and complexity.

Allowance for credit losses - The allowance for credit losses is a valuation
allowance for probable losses incurred on loans. Loans are charged to the
allowance when the loss actually occurs or when a determination is made that a
probable loss has occurred. Recoveries are credited to the allowance at the time
of recovery. Throughout the year, management estimates the probable level of
losses to determine whether the allowance for credit losses is adequate to
absorb losses in the existing portfolio. Based on these estimates, an amount is
charged to the provision for credit losses and credited to the allowance for
credit losses in order to adjust the allowance to a level determined to be
adequate to absorb losses. Management's judgment as to the level of probable
losses on existing loans involves the consideration of current economic
conditions and their estimated effects on specific borrowers; an evaluation of
the existing relationships among loans, potential credit losses and the present
level of the allowance; results of


                                       13
<PAGE>

examinations of the loan portfolio by regulatory agencies; and management's
internal review of the loan portfolio. In determining the collectibility of
certain loans, management also considers the fair value of any underlying
collateral. The amount ultimately realized may differ from the carrying value of
these assets because of economic, operating or other conditions beyond the
Company's control. Please refer to the subsequent discussion of "Allowance for
Credit Losses" below as well as Note A to the consolidated financial statements
in the annual report for additional insight into management's approach and
methodology in estimating the allowance for credit losses.


RESTATEMENT OF FINANCIAL STATEMENTS

As discussed in Note 10, the accompanying interim condensed consolidated
financial statements for the three months and six months periods ended June 30,
2003 and 2002 have been restated so that the sales of our banking offices in
Eagle Pass, Carrizo Springs, Crystal City and Pearsall and the financial results
and condition pertaining to these four (4) South Texas banking offices are not
separately reported as discontinued operations. The Company had previously
reported the sales of these four (4) banking offices and their related financial
results and condition as discontinued operations. The restatement no longer
separately reports these banking offices and their respective financial results
and condition as discontinued operations and reflects all required adjustments.
Net income, basic and diluted earnings per share and shareholders' equity for
the previously reported period were not affected by the restatement. The
accompanying management's discussion and analysis gives effect to the
restatement.

SIGNIFICANT DEVELOPMENTS

On July 16, 2003, the Company and the Bank entered into a definitive agreement
with RBC Mortgage Company to sell the Bank's 80% indirect interest in SCMC. The
remaining 20% interest is owned by management and employees of SCMC. The gross
proceeds to the Bank are estimated to be approximately $83 million at closing.
Net of tax and transaction costs, the Bank expects to realize net cash proceeds
of approximately $49 million. The sale consists of all of the stock of SCMC. In
addition, effective July 16, 2003, the Bank purchased from SCMC its mortgage
servicing portfolio of $15.5 million at June 30, 2003. The purchase price paid
by the Bank for the mortgage servicing portfolio was approximately $15.5
million. It is anticipated that the Bank, in a separate transaction, will sell
the mortgage servicing portfolio to a third party prior to the consummation of
the sale of SCMC.

On May 8, 2003, the Bank sold three banking offices in south Texas to an
investor group headed by the current executive officers of the three locations.
Assets of $16.6 million, loans of $15.2 million and deposits of $42.1 million
were sold in the transaction. A before-tax loss of $142 thousand was recorded on
the sale.

On March 20, 2003, the Bank sold its banking office located in Eagle Pass, Texas
to South Texas National Bank of Laredo. Assets of $18.7 million, loans of $16.8
million and deposits of $95.7 million were sold in the transaction. A before-tax
gain of $3.4 million related to the sale of the Eagle Pass banking office
was recorded in the first quarter of 2003.

During April, 2003, the Bank raised approximately $50 million through a private
offering of subordinated unsecured notes. The subordinated notes issued by the
Bank bear interest at a fixed rate of 7.375% and mature over a ten year period
ending April 15, 2013, with semi-annual interest payment. These subordinated
notes are not convertible or redeemable. In June 2003, the Bank entered into an
interest rate swap agreement in which the Bank swapped $50 million fixed rate
subordinated debt to floating rate debt. Under the terms of the agreement, the
Bank will receive the fixed coupon rate of 7.375% associated with the
subordinated debt and will pay its swap counterparty a variable interest rate
equal to the three-month London Inter-Bank Rate ("LIBOR"), that is reset on a
quarterly basis, plus 3.62%. This swap is designated as a fair-value hedge and
qualifies for "short-cut" hedge accounting treatment under SFAS 133, such that
changes in the fair value of the swap will not be reflected in the income
statement.


                                       14
<PAGE>

NON-GAAP PRESENTATIONS

The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains financial information determined by methods other
than in accordance with Generally Accepted Accounting Principles ("GAAP").
Management uses these non-GAAP measures in their analysis of the business and
its performance. In particular, net interest income and net interest margin as
reflected in the Consolidated Yield Analysis table are calculated on both a GAAP
based measurement and on a fully tax-equivalent basis ("FTE"). Management
believes that these measures calculated on a FTE basis provide a useful picture
of net interest income and net interest margin for comparative purposes. The
GAAP based measures do not take into consideration the tax-exempt status of
certain income. Net interest income and net interest margin calculated on a FTE
basis are determined by adjusting net interest income to reflect tax-exempt
interest income on an equivalent before-tax basis. Non-GAAP information
presented by other companies may not be comparable to that presented herein,
since each company may define non-GAAP measured differently.

RESULTS OF OPERATIONS

A discussion of the Company's results of operations is presented below. Certain
reclassifications have been made to make prior periods comparable.

In July 2003, the Company and the Bank entered into a definitive agreement to
sell the Bank's 80% indirect interest in SCMC. Revenues, operating costs and
expenses, and other non-operating results from the discontinued operations of
SCMC are excluded from the Company's results from continuing operations at and
for the periods ending June 30, 2003 and December 31, 2002.

The assets and liabilities of SCMC are presented in the Company's interim
condensed consolidated balance sheets in the line items "Assets related to
discontinued operations" and "Liabilities related to discontinued operations" at
December 31, 2002 and June 30, 2003. The financial results of SCMC are presented
in the Company's interim condensed consolidated statements of income under the
line items "Income (loss) from discontinued operations before income taxes" and
"Income (loss) from discontinued operations" and in the Company's Consolidated
Statements of Cash Flows as "Net cash used in discontinued operations" for each
of the periods ending June 30, 2003 and December 31, 2002.

SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SAME PERIOD IN  2002

NET INCOME - Net income for the six-month period ended June 30, 2003 was $15.9
million as compared to $17.7 million for the same period in 2002, a decrease of
approximately $1.8 million or 10.2%. Included in net income is a before-tax net
gain of $3.2 million related to the sales of the banking offices. Also a
before-tax expense of $8.2 million was recorded by SCMC in June 2003 to reflect
an impairment to the mortgage servicing rights. The impairment charge is
included in loss from discontinued operations. Income from continuing operations
for the six-month period ended June 30, 2003 was $15.7 million as compared to
$15.4 million for the same period in 2002, an increase of approximately $375
thousand or 2.4%.

NET INTEREST INCOME - Net interest income for the six-month period ended June
30, 2003, was $74.5 million, as compared to $68.1 million for the same period in
2002, an increase of $6.3 million or 9.3%. The increase is primarily due to the
average loan growth of 29.8%. The growth in average loans that was related to
the acquisition of Eagle National was 2.5%.

While average earning assets for the period ended June 30, 2003 increased over a
year ago, the average yield decreased 94 basis points from 6.95% for the
six-month period ended June 30, 2002, to 6.01% for the same period in 2003. As
of June 30, 2003, average interest bearing liabilities were $2.1 billion, an
increase of $413.1 million or 24.8% from June 30, 2002. Average interest bearing
deposits at June 30, 2003 were


                                       15
<PAGE>


$1.6 billion, an increase of 9.7% from June 30, 2002. The increase in average
interest bearing deposits related to the acquisition of Eagle National was 2.8%.
The cost of interest bearing liabilities decreased 43 basis points from 1.86%
for the six months ended June 30, 2002 to 1.43% during the same period in 2003.

The Company's 5.01% net interest margin for the six months ended June 30, 2003
decreased from the 5.67% net interest margin recorded during the same period in
2002. Additionally, the Company's 5.06% tax equivalent net interest margin for
the six months ended June 30, 2003 decreased from the 5.74% tax equivalent net
interest margin recorded during the same period in 2002. In November 2002 and
June 2003, the Federal Reserve Bank decreased the discount rate 50 basis points
and 25 basis points, respectively. Since the Company's balance sheet is asset
sensitive, the interest earning assets generally reprice more quickly than the
interest bearing liabilities. Thus, the Company's net interest margin tends to
increase in periods of rising interest rates in the market and decrease in
periods of declining interest rates.



                                       16
<PAGE>

The following schedule gives a comparative analysis of the Company's daily
average interest-earning assets and interest-bearing liabilities for the
six-month periods ended June 30, 2003 and 2002, respectively:

                           CONSOLIDATED YIELD ANALYSIS
                            SIX MONTHS ENDED JUNE 30,
                             (DOLLARS IN THOUSANDS)

<Table>
<Caption>
                                                                  2003                                   2002
                                                   -------------------------------------   -----------------------------------
                                                    AVERAGE                     AVERAGE     AVERAGE                   AVERAGE
                                                    BALANCE      INTEREST        YIELD      BALANCE      INTEREST      YIELD
                                                   ----------    ---------     ---------   ----------    ---------   ---------
<S>                                                 <C>          <C>           <C>          <C>          <C>         <C>
INTEREST EARNING ASSETS:
Interest bearing deposits in financial
  institutions                                     $    1,220    $      36          5.95%  $    2,266    $      59        5.25%
Federal funds sold and securities
  purchased under agreements to resell                 15,119           86          1.15%      35,617          339        1.92%
Trading assets                                        114,244        1,733          3.06%     101,821        1,967        3.90%
Investment securities (taxable)                       250,865        4,925          3.96%     242,626        7,650        6.36%
Investment securities (tax-exempt)                     56,601        1,244          4.43%      70,215        1,520        4.37%
Loans held for sale (taxable)                         567,100       15,604          5.55%     269,961        9,798        7.32%
Loans held for investment (taxable)                 1,985,866       65,439          6.65%   1,695,509       61,996        7.37%
Loans (tax-exempt)                                      4,743          153          6.51%       5,046          157        6.27%
                                                   ----------    ---------     ---------   ----------    ---------   ---------
  Total Interest Earning Assets                     2,995,758       89,220          6.01%   2,423,061       83,486        6.95%

NONINTEREST EARNING ASSETS:
Cash and due from banks                                98,825                                  97,022
Premises and equipment, net                            49,423                                  51,883
Other assets                                          230,240                                 179,354
Allowance for credit losses                           (28,756)                                (24,014)
Assets related to discontinued operations              53,149                                  39,514
                                                   ----------                              ----------
  Total Noninterest Earning Assets                    402,881                                 343,759
                                                   ----------                              ----------

  TOTAL ASSETS                                     $3,398,639                              $2,766,820
                                                   ==========                              ==========

INTEREST BEARING LIABILITIES:
Demand and savings deposits                           903,730    $   2,749          0.61%  $  878,743    $   4,712        1.08%
Certificates and other time deposits                  697,182        8,053          2.33%     580,393        8,544        2.97%
Other borrowed funds                                  435,603        2,926          1.35%     186,275        1,721        1.86%
Notes payable                                          20,252          320          3.19%      20,879          400        3.86%
Subordinated debt                                      22,621          716          6.38%          --           --        0.00%
                                                   ----------    ---------     ---------   ----------    ---------     -------
  Total Interest Bearing Liabilities                2,079,388       14,764          1.43%   1,666,290       15,377        1.86%

NONINTEREST BEARING LIABILITIES:
Demand deposits                                       931,769                                 780,822
Other liabilities                                      13,483                                  14,688
Liabilities related to discontinued operations         34,231                                  20,314
                                                   ----------                              ----------
  Total Noninterest Bearing Liabilities               979,483                                 815,824

Trust preferred securities                             80,000                                  57,500
Shareholders' equity                                  259,768                                 227,206
                                                   ----------                              ----------

  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY       $3,398,639                              $2,766,820
                                                   ==========                              ==========

NET INTEREST INCOME & MARGIN                                     $  74,456          5.01%                 $  68,109       5.67%
                                                                 =========     =========                  =========    =======
NET INTEREST INCOME & MARGIN (TAX EQUIVALENT)(1)                 $  75,159          5.06%                 $  68,934       5.74%
                                                                 =========     =========                  =========    =======
</Table>



(1) In order to present pretax income and resultant yields on tax-exempt
investments and loans on a comparable basis to those on taxable investments and
loans, a tax-equivalent adjustment has been made equally to interest income and
income tax expense with no effect on after tax income. The tax equivalent
adjustment has been computed using a federal income tax rate of 35%.



                                       17
<PAGE>


PROVISION FOR CREDIT LOSSES - The provision for credit losses for the six months
ended June 30, 2003 was $10.5 million, as compared to $5.7 million for the same
period in 2002, an increase of $4.8 million. A provision for credit losses of
$1.0 million was recorded in the first quarter of 2003 for loans purchased with
Eagle National. The increase in the provision for credit losses was due to a
moderate deterioration of the loan portfolio quality and the addition of certain
loans to the Bank's monitored loan list. The Company's allowance for credit
losses increased by $4.3 million from $27.2 million at December 31, 2002, to
$31.6 million on June 30, 2003. The increase in the allowance for credit losses
is primarily due to the $10.5 million provision for credit losses offset by $5.9
million in net charge-offs. Please refer to the subsequent discussion of
ALLOWANCE FOR CREDIT LOSSES and RISK ELEMENTS for additional insight to
management's approach and methodology in estimating the allowance for credit
losses.

NONINTEREST INCOME - Total noninterest income for the six months ended June 30,
2003 was $18.3 million, as compared to $14.3 million for the same period in
2002, an increase of $4.0 million or 27.6%. Noninterest income for the six
months ended June 30, 2003 and 2002, respectively, is summarized as follows (in
thousands):

<Table>
<Caption>
                                                      FOR THE SIX MONTHS ENDED
                                                    JUNE 30, 2003   JUNE 30, 2002
                                                    -------------   -------------
<S>                                                 <C>             <C>
Customer service fees                               $       8,300   $       8,252
Bank owned life insurance                                   1,012           1,029
Debit card income                                             785             599
Gain on the sale of trading assets                            627             309
Gain on the sale of securities                                374              --
Gain on the sale of the Eagle Pass banking office           3,382              --
Sale of Community charter                                      --             150
Other                                                       3,787           3,972
                                                    -------------   -------------
                                                    $      18,267   $      14,311
                                                    =============   =============
</Table>

Customer service fees for the six-month period end June 30, 2003 increased $48
thousand. An increase in customer service fees of $453 thousand as a result in
the growth in deposit transaction accounts and the acquisition of Eagle National
in September 2002 was offset by the reduction of service fees as a result of the
sale of the banking offices in Eagle Pass, Carrizo Springs, Crystal City and
Pearsall in 2003. The Bank recognized a gain of $3.4 million on the sale of
Eagle Pass. During the six months ended quarter of 2003, the Bank had a gain on
the sale of securities of $374 thousand. Also the Bank had an increase of $318
thousand in gains on the sale of trading assets. In June 2002, the Company sold
the charter for Community Bank to Sabine State Bank & Trust Company for $150
thousand.

NONINTEREST EXPENSE - Noninterest expense increased $4.4 million or 8.1%, to
$58.7 million for the six-month period ending June 30, 2003 as compared to $54.3
million for the same period in 2002. Noninterest expense for the six months
ended June 30, 2003 and 2002, respectively, is summarized as follows (in
thousands):

<Table>
<Caption>
                                                       FOR THE SIX MONTHS ENDED
                                                   JUNE 30, 2003    JUNE 30, 2002
                                                   -------------    -------------
<S>                                                <C>              <C>
Salaries and employee benefits                     $      33,333    $      30,538
Occupancy expense                                          7,712            7,512
Net (gain) loss and carrying costs of
    real estate acquired by foreclosure                     (211)              71
FDIC assessment                                              213              189
Technology                                                 2,429            2,432
Postage and delivery charges                               1,119            1,119
Supplies                                                     686              648
Professional fees                                          1,983            1,864
Minority interest expense:
  Company-obligated mandatorily redeemable trust
    preferred securities of subsidiary trusts              3,101            2,655
Marketing                                                  1,177              531
Other                                                      7,154            6,729
                                                   -------------    -------------
                                                   $      58,696    $      54,288
                                                   =============    =============
</Table>


                                       18
<PAGE>

Salaries and employee benefits for the six-month period ended June 30, 2003 were
$33.3 million, as compared to $30.5 million for the same period in 2002, an
increase of $2.8 million or 9.2%. The increase is primarily related to merit
increases, increased payroll taxes and increased hospital and medical insurance
expenses. Additionally, salaries and employee benefits expenses related to the
acquisition of Eagle National were $561 thousand.

Minority interest expense increased $446 thousand or 16.8% from the six months
ended June 30, 2002 as compared to the same period in 2003. The increase is
related to the interest due on the additional trust preferred securities issued
in August 2002 and September 2002 offset by the redemption of trust preferred
securities in November 2002.

The Company has increased its marketing and branding efforts through increased
television and radio programming. As a result of these efforts, marketing
expenses for the six-month period ended June 30, 2003 were $1.2 million, an
increase of $646 thousand or 123.5% from $531 thousand for the same period in
2002.

PROVISION FOR INCOME TAXES - The aggregate provision for income taxes as a
percent of total income before taxes decreased from 33.2% for the six months of
2002 to 32.9% for the same period in 2003. The provision of income taxes as a
percent of income from continuing operations before taxes was 31.5% for the six
months ended June 30, 2002 as compared to 33.0% for the same period in 2003.

THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO SAME PERIOD IN 2002

NET INCOME - Net income for the three-month period ended June 30, 2003 was $4.6
million as compared to $9.4 million for the same period in 2002, a decrease of
approximately $4.7 million or 50.5%. Income from continuing operations for the
three-month period ended June 30, 2003 was $6.1 million as compared to $7.9
million for the same period in 2002, a decrease of approximately $1.7 million or
21.8%. The decrease was due, in a large part, to a higher loan loss provision
during the quarter ended June 30, 2003.

NET INTEREST INCOME - Net interest income for the three-month period ended June
30, 2003, was $37.3 million, as compared to $35.2 million for the same period in
2002, an increase of $2.2 million or 6.2%. The increase is primarily due to the
average loan growth of 28.9%. The growth in average loans related to the
acquisition of Eagle National was 2.3%.

While average earning assets for the period ended June 30, 2003 increased over a
year ago, the average yield decreased 100 basis points from 6.92% for the
three-month period ended June 30, 2002, to 5.92% for the same period in 2003. As
of June 30, 2003, average interest bearing liabilities were $2.1 billion, an
increase of $408.0 million or 24.1% from June 30, 2002. Average interest bearing
deposits at June 30, 2003 were $1.6 billion, an increase of 7.1% from June 30,
2002. The increase in average interest bearing deposits that was related to the
acquisition of Eagle National was 2.7%. The cost of interest bearing liabilities
decreased 35 basis points from 1.79% for the three months end June 30, 2002 to
1.44% during the same period in 2003.

 The Company's 4.92% net interest margin for the three months ended June 30,
2003 decreased from the 5.70% net interest margin recorded during the same
period in 2002. Additionally, the Company's 4.96% tax equivalent net interest
margin for the three months ended June 30, 2003 decreased from the 5.77% tax
equivalent net interest margin recorded during the same period in 2002. In
November 2002 and June 2003, the Federal Reserve Bank decreased the discount
rate 50 basis points and 25 basis points, respectively. Since the Company's
balance sheet is asset sensitive, the interest earning assets generally reprice
more quickly than the interest bearing liabilities. Thus, the Company's net
interest margin tends to increase in periods of rising interest rates in the
market and decrease in periods of declining interest rates.



                                       19
<PAGE>

The following schedule gives a comparative analysis of the Company's daily
average interest-earning assets and interest-bearing liabilities for the
three-month periods ended June 30, 2003 and 2002, respectively:

                           CONSOLIDATED YIELD ANALYSIS
                           THREE MONTHS ENDED JUNE 30,
                             (DOLLARS IN THOUSANDS)

<Table>
<Caption>
                                                                   2003                                    2002
                                                   -------------------------------------   -----------------------------------
                                                    AVERAGE                    AVERAGE      AVERAGE                   AVERAGE
                                                    BALANCE      INTEREST       YIELD       BALANCE      INTEREST      YIELD
                                                   ----------    ----------    ---------   ----------    ---------   ---------
<S>                                                 <C>          <C>           <C>          <C>          <C>         <C>
INTEREST EARNING ASSETS:
Interest bearing deposits in financial
  institutions                                     $    1,291    $       17        5.28%   $    2,276    $      30       5.29%
Federal funds sold and securities
  purchased under agreements to resell                 13,958            39        1.12%       27,221          124       1.83%
Trading assets                                        107,383           871        3.25%      100,396          917       3.66%
Investment securities (taxable)                       240,922         2,201        3.66%      238,422        3,767       6.34%
Investment securities (tax-exempt)                     54,889           595        4.35%       67,824          739       4.37%
Loans held for sale (taxable)                         617,822         8,462        5.49%      311,533        5,722       7.37%
Loans held for investment (taxable)                 2,002,939        32,637        6.54%    1,721,485       31,335       7.30%
Loans (tax-exempt)                                      4,545            73        6.44%        4,994           80       6.43%
                                                   ----------    ----------    --------    ----------    ---------   --------
  Total Interest Earning Assets                     3,043,749        44,895        5.92%    2,474,151       42,714       6.92%

NONINTEREST EARNING ASSETS:
Cash and due from banks                                95,346                                  94,437
Premises and equipment, net                            47,951                                  51,721
Other assets                                          229,629                                 183,918
Allowance for credit losses                           (29,250)                                (24,267)
Assets related to discontinued operations             53,190                                  41,160
                                                   ----------                              ----------
  Total Noninterest Earning Assets                    396,866                                 346,969
                                                   ----------                              ----------

TOTAL ASSETS                                       $3,440,615                              $2,821,120
                                                   ==========                              ==========

INTEREST BEARING LIABILITIES:
Demand and savings deposits                           886,105    $    1,288        0.58%   $  884,354    $    2,332      1.06%
Certificates and other time deposits                  679,685         3,827        2.26%      577,033         4,032      2.80%
Other borrowed funds                                  470,633         1,578        1.34%      210,922           995      1.89%
Notes payable                                          19,792           155        3.14%       20,879           197      3.78%
Subordinated debt                                      44,994           716        6.38%           --            --      0.00%
                                                   ----------    ----------    --------    ----------    ---------   --------
  Total Interest Bearing Liabilities                2,101,209         7,564        1.44%    1,693,188         7,556      1.79%

NONINTEREST BEARING LIABILITIES:
Demand deposits                                       949,373                                 804,519
Other liabilities                                      13,085                                  13,384
Liabilities related to discontinued operations         33,200                                  21,531
                                                   ----------                              ----------
  Total Noninterest Bearing Liabilities               995,658                                 839,434

Trust preferred securities                             80,000                                  57,500
Shareholders' equity                                  263,748                                 230,998
                                                   ----------                              ----------

  TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY       $3,440,615                              $2,821,120
                                                   ==========                              ==========

NET INTEREST INCOME & MARGIN                                     $   37,331        4.92%                $   35,158         5.70%
                                                                 ==========    ========                 ==========   =========

NET INTEREST INCOME & MARGIN (TAX EQUIVALENT)(1)                 $   37,667        4.96%                $   35,563         5.77%
                                                                 ==========    ========                 ==========   =========
</Table>


----------
(1) In order to present pretax income and resultant yields on tax-exempt
investments and loans on a comparable basis to those on taxable investments and
loans, a tax-equivalent adjustment has been made equally to interest income and
income tax expense with no effect on after tax income. The tax equivalent
adjustment has been computed using a federal income tax rate of 35%.



                                       20
<PAGE>

PROVISION FOR CREDIT LOSSES - The provision for credit losses for the second
quarter of 2003 was $6.1 million, as compared to $3.1 million for the same
period in 2002, an increase of $3.0 million . The increase in the provision for
credit losses was due to a moderate deterioration of the loan portfolio quality
and the addition of certain loans to the Bank's monitored loan list. The
Company's allowance for credit losses increased by $3.2 million from $28.4
million at March 31, 2003, to $31.6 million on June 30, 2003. The increase in
the allowance for credit losses is primarily due to the $6.1 million provision
for credit losses offset by $3.0 million in net charge-offs. Please refer to the
subsequent discussion of ALLOWANCE FOR CREDIT LOSSES and RISK ELEMENTS for
additional insight to management's approach and methodology in estimating the
allowance for credit losses.

NONINTEREST INCOME - Total noninterest income for the quarter ended June 30,
2003 was $7.0 million, as compared to $7.5 million for the same period in 2002,
a decrease of $419 thousand or 5.62%. Noninterest income for the three months
ended June 30, 2003 and 2002, respectively, is summarized as follows (in
thousands):

<Table>
<Caption>
                                                     FOR THE THREE MONTHS ENDED
                                                   JUNE 30, 2003   JUNE 30, 2002
                                                   -------------   -------------
<S>                                                <C>             <C>
Customer service fees                              $       3,986   $       4,150
Bank owned life insurance                                    507             520
Debit card income                                            412             322
Gain on the sale of trading assets                           280             188
Sale of Community charter                                     --             150
Other                                                      1,854           2,128
                                                   -------------   -------------
                                                   $       7,039   $       7,458
                                                   =============   =============
</Table>

Customer service fees decreased $164 thousand from the three month period ending
June 30, 2002 as compared to the same period in 2003. The change is due, in
part, to a decrease in customer service fees of $323 thousand resulting from the
sale of the banking offices in Eagle Pass, Carrizo Springs, Crystal City and
Pearsall in 2003 which offset the increase in service fees of $159 thousand
resulting from the growth in deposit transaction accounts and the acquisition of
Eagle National in September 2002. In June 2002, the Company sold the charter for
Community Bank to Sabine State Bank & Trust Company for $150 thousand.

NONINTEREST EXPENSE - Noninterest expense increased $1.2 million or 4.1%, to
$29.1 million for the three-month period ending June 30, 2003 as compared to
$27.9 million for the same period in 2002. Noninterest expense for the three
months ended June 30, 2003 and 2002, respectively, is summarized as follows (in
thousands):


<Table>
<Caption>

                                                     FOR THE THREE MONTHS ENDED
                                                   JUNE 30, 2003   JUNE 30, 2002
                                                   -------------   -------------
<S>                                                <C>             <C>
Salaries and employee benefits                     $      16,082    $     15,562
Occupancy expense                                          3,960           3,835
Net (gain) loss and carrying costs of
    real estate acquired by foreclosure                     (205)              5
FDIC assessment                                              105             137
Technology                                                 1,229           1,275
Postage and delivery charges                                 522             556
Supplies                                                     332             291
Professional fees                                          1,289           1,250
Minority interest expense:
  Company-obligated mandatorily redeemable trust
    preferred securities of subsidiary trusts              1,549           1,325
Marketing                                                    536             290
Other                                                      3,654           3,373
                                                   -------------   -------------
                                                   $      29,053    $     27,899
                                                   =============   =============
</Table>


                                       21
<PAGE>

Salaries and employee benefits for the three-month period ended June 30, 2003
were $16.1 million, as compared to $15.6 million for the same period in 2002, an
increase of $520 thousand or 3.3%. The increase is primarily related to merit
increases, increased payroll taxes and increased hospital and medical insurance
expenses. Additionally, increased salaries and employee benefits expenses
related to the acquisition of Eagle National were $226 thousand.

Minority interest expense increased $224 thousand or 16.9% from the three months
ended June 30, 2002 as compared to the same period in 2003. The increase is
related to the interest due on the additional trust preferred securities issued
in August 2002 and September 2002 offset by the redemption of trust preferred
securities in November 2002.

PROVISION FOR INCOME TAXES - The aggregate provision for income taxes as a
percent of total income before taxes decreased from 33.4% for the second quarter
of 2002 to 30.6% for the same period in 2003. The provision for income taxes as
a percent of income from continuing operations before taxes increased from 31.9%
to 33.2% for the same period in 2003.

FINANCIAL CONDITION

TOTAL ASSETS - The total consolidated assets of the Company decreased $137.6
million from $3.6 billion at December 31, 2002 to $3.4 billion at June 30, 2003.
Assets sold with the Eagle Pass office in March 2003 totaled $18.7 million.
Assets sold with the banking offices located in Carrizo Springs, Crystal City
and Pearsall in May 2003 totaled $16.6 million.

CASH AND CASH EQUIVALENTS - The Company had cash and cash equivalents of $156.7
million at June 30, 2003. Comparatively, the Company had $147.0 million in cash
and cash equivalents on December 31, 2002, an increase of $9.7 million.

TRADING ASSETS - The Company trades SBA 7(a) government guaranteed loans and
pools. Trading assets as of June 30, 2003 were $137.8 million, a decrease of
$5.0 million from December 31, 2002. These assets are generally held up to 120
days. The trading assets are carried at fair market value. The realized and
unrealized gains and losses on these assets are included in income.

SECURITIES - The Company's securities portfolio as of June 30, 2003, totaled
$279.3 million, as compared to $313.1 million on December 31, 2002, a decrease
of $33.8 million or 10.8%. During the first quarter of 2003, the Bank sold $16.5
million of securities. The remaining decrease is due to principal paydowns and
maturities. At June 30, 2003, the unrealized gain on the available for sale
securities was $4.8 million.

LOANS HELD FOR SALE - Total loans held for sale decreased from $701.3 million at
December 31, 2002 to $604.3 million at June 30, 2003, a decrease of $97.0
million, or 13.8%. The majority of these loans represent loans funded by the
Bank through a mortgage warehouse line to SCMC. Upon closing of the sale of
SCMC, this warehouse facility is expected to run off and not be replaced.

LOANS HELD FOR INVESTMENT - As of June 30, 2003, loans held for investment were
$2.04 billion which was a $98.6 million increase from the balance of $1.94
billion at December 31, 2002. At June 30, 2003, loans held for investment as a
percentage of total assets and total deposits were 59.3% and 78.7%,
respectively.



                                       22
<PAGE>

The following table summarizes the Company's loan portfolio by type of loan as
of June 30, 2003 (in thousands):

<Table>
<Caption>
                                                                  PERCENT OF
                                                     AMOUNT         TOTAL
                                                   ----------     ----------
<S>                                                <C>            <C>
Commercial, financial and industrial               $  628,638        23.75%
Real estate - commercial                              690,867        26.11%
Real estate - residential mortgage                    200,145         7.56%
Real estate - construction                            385,295        14.56%
Foreign commercial and industrial                       6,602         0.25%
Consumer and other                                    130,602         4.93%
Unearned discounts                                         --         0.00%
                                                   ----------     --------
    Total loans held for investment                 2,042,149        77.16%
    Loans held for sale                               604,337        22.84%
                                                   ----------     --------
    Total loans                                    $2,646,486       100.00%
                                                   ==========     ========
</Table>


ALLOWANCE FOR CREDIT LOSSES - The following is a summary of the changes in the
allowance for credit losses for the six months ended June 30, 2003 and June 30,
2002, respectively, (in thousands):

<Table>
<Caption>
                                                        SIX MONTHS ENDED
                                                            JUNE 30,
                                                   -------------------------
                                                      2003            2002
                                                   ----------     ----------
<S>                                                <C>            <C>
Allowance for credit losses, January 1,            $   27,248     $   22,927
Charge-offs                                            (6,793)        (5,372)
Recoveries                                                924            951
Provision for credit losses                            10,548          5,711
Allowance related to Eagle Pass divestiture              (353)            --
                                                   ----------     ----------
Allowance for credit losses, June 30,              $   31,574     $   24,217
                                                   ==========     ==========
Net charge-offs as a percentage of average
  loans (annualized)                                     0.46%          0.45%
                                                   ==========     ==========

Provision for credit losses as a percentage of
  average loans (annualized)                             0.83%          0.58%
                                                   ==========     ==========
</Table>


The following is a summary of the relationship of the allowance for credit
losses to total loans at June 30, 2003, and December 31, 2002 (in thousands):

<Table>
<Caption>
                                                    JUNE 30,     DECEMBER 31,
                                                      2003           2002
                                                   ----------    ------------
<S>                                                <C>           <C>
Loans at period-end                                $2,646,486    $  2,644,862
Allowance for credit losses                        $   31,574    $     27,248
Allowance as a percent of period-end loans               1.19%           1.03%
</Table>


In order to determine the adequacy of the allowance for credit losses,
management considers the risk classification and delinquency status of loans and
other factors. Management also establishes specific allowances for credits which
management believes require allowances greater than those allocated according to
their risk classification. An unallocated allowance is also established based on
the Company's historical charge-off experience. The Company will continue to
monitor the adequacy of the allowance for credit losses to determine the
appropriate accrual for the Company's provision for credit losses.


                                       23
<PAGE>

 RISK ELEMENTS - Nonperforming, past-due, and restructured loans are fully or
substantially secured by assets, with any excess of loan balances over
collateral values specifically allocated in the allowance for credit losses.
Thirty-four properties make up the $4.7 million of other real estate owned
("ORE") at June 30, 2003. All properties are carried at the lower of cost or
fair market value.

The Company defines potential problem loans as those loans for which information
known by management indicates serious doubt that the borrower will be able to
comply with the present payment terms. Management identifies these loans through
its continuous loan review process and defines potential problem loans as those
loans classified as "substandard", "doubtful", or "loss". As of June 30, 2003,
the Company has no material foreign loans outstanding or loan concentrations.

The following table summarizes total nonperforming assets and potential problem
loans at June 30, 2003 and at December 31, 2002:

<Table>
<Caption>
                                                           JUNE 30,     DECEMBER 31,
                                                            2003             2002
                                                        ------------    ------------
                                                               (IN THOUSANDS)
<S>                                                     <C>             <C>
Nonaccrual loans                                        $     20,089    $     19,654
Other real estate ("ORE") and other foreclosed assets          4,825           3,424
                                                        ------------    ------------
  Total nonperforming assets                            $     24,914    $     23,078
                                                        ============    ============

Total nonperforming assets as a % of loans,
  ORE and other foreclosed assets                               0.94%           0.87%

Allowance for credit losses as a percentage of
  nonperforming assets                                        126.73%         118.07%

Accruing loans past due 90 days or more                 $        110    $        984

Potential problem loans, other than those shown
  above as nonperforming                                $     80,687    $     62,189
</Table>


PREMISES AND EQUIPMENT - The Company's premises and equipment, net of
depreciation, as of June 30, 2003, was $46.7 million, as compared to $51.6
million as of December 31, 2002, a decrease of $5.0 million.

DEPOSITS - Total deposits as of June 30, 2003, were $2.59 billion, as compared
to $2.67 billion on December 31, 2002, a decrease of $79.3 million. Deposits of
$95.7 million were sold with the Eagle Pass banking office in March 2003.
Deposits of $42.1 were sold with three banking offices located in south Texas in
May 2003. The percentage of noninterest bearing deposits to total deposits as of
June 30, 2003 was 39.8%.

CAPITAL RESOURCES AND LIQUIDITY

SHAREHOLDERS' EQUITY - At June 30, 2003, shareholders' equity totaled $261.5
million, as compared to $249.3 million at December 31, 2002. The Company's
risk-based capital ratios remain above the levels designated by regulatory
agencies for the Company to be considered as "well capitalized" on June 30,
2003, with Tier 1 capital, total risk-based capital, and leverage capital ratios
of 10.34%, 13.33%, and 8.38%, respectively.

LIQUIDITY - Effective management of balance sheet liquidity is necessary to fund
growth in earning assets and to pay liability maturities, depository withdrawals
and shareholders' dividends. The Company has instituted asset/liability
management policies, including but not limited to a computer simulation model,
to


                                       24
<PAGE>


improve liquidity controls and to enhance its management of interest rate risk
and financial condition. The Company has numerous sources of liquidity including
a significant portfolio of short-term assets, marketable investment securities
(excluding those presently classified as "held-to-maturity"), loans
available-for-sale, core deposits and access to borrowing arrangements.
Available borrowing arrangements maintained by the Company include federal funds
lines with other commercial banks and Federal Home Loan Bank ("FHLB") advances.
Also in 2002, the Bank began accepting brokered certificates of deposits to
assist in funding the growth of the held for sale loan portfolio.

During April, 2003, the Bank raised approximately $50 million through a private
offering of subordinated unsecured notes. The subordinated notes issued by the
Bank bear interest at a fixed rate of 7.375% and mature over a ten year period
ending April 15, 2013, with semi-annual interest payment. These subordinated
notes are not convertible or redeemable. In June 2003, the Bank entered into an
interest rate swap agreement in which the Bank swapped $50 million fixed rate
subordinated debt to floating rate debt. Under the terms of the agreement, the
Bank will receive the fixed coupon rate of 7.375% associated with the
subordinated debt and will pay its swap counterparty 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 and qualifies for "short-cut"
hedge accounting treatment under SFAS 133, such that changes in the fair value
of the swap will not be reflected in the income statement.

As of June 30, 2003, the Company had $18.3 million outstanding under a term loan
with Wells Fargo Bank, National Association ("Wells Fargo"). The term note bears
interest at a rate per annum of 1.95% above the federal funds rate from time to
time. The federal funds rate is a fluctuating interest rate per annum set daily
by Wells Fargo as the rate at which funds are offered to Wells Fargo by federal
funds brokers. The indebtedness evidenced by the term note is payable in
quarterly installments with a final maturity date of February 1, 2006. The
Credit Agreement requires the Company and the Bank to maintain certain financial
ratios and includes other restrictive covenants. At June 30, 2003, the Company
and Bank were in compliance with all related financial covenants for this credit
facility.

ITEM 4. CONTROLS AND PROCEDURES.

Based on their evaluation of the Company's disclosure controls and procedures as
of June 30, 2003, the Chief Executive Officer and Chief Financial Officer of the
Company have each concluded that as of the evaluation date, such disclosure
controls and procedures were effective to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.

There were no changes in the Company's internal control over financial reporting
during the quarter ending June 30, 2003 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.


                                       25
<PAGE>


PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

        4.1       Fiscal and Paying Agency Agreement dated April 10, 2003
                  between Sterling Bank and Deutsche Bank Trust Company
                  Americas. [Incorporated by reference to Exhibit 4.1 of the
                  Company's Report on Form 8-K filed on April 15, 2003 (File No.
                  000-20750).]

        4.2       Form of Global Certificate representing Sterling Bank's 7.375%
                  Subordinated Notes due 2013. [Incorporated by reference to
                  Exhibit 4.2 of the Company's Report on Form 8-K filed on April
                  15, 2003 (File No. 000-20750).]

       10.1       Sterling Bancshares, Inc. 2003 Stock Incentive and
                  Compensation Plan. [Incorporated by reference to Exhibit 4.4
                  of the Company's Registration Statement on Form S-8 (File No.
                  333-105307).]

       10.2       Purchase Agreement dated April 3, 2003 among Sterling Bank,
                  Lehman Brothers Inc. and Keefe, Bruyette & Woods, Inc.
                  [Incorporated by reference to Exhibit 10.1 of the Company's
                  Report Form 8-K filed on April 15, 2003 (File No. 000-20750).]

       11    --   Statement Regarding Computation of Earnings Per Share
                  (included as Note (2) to Interim Consolidated Financial
                  Statements on page 5 of this Amendment No. 1 to Quarterly
                  Report on Form 10-Q/A).

      *31.1  --   Certification of J. Downey Bridgwater, President and Chief
                  Executive Officer, as required pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.

      *31.2  --   Certification of Stephen C. Raffaele, Executive Vice President
                  and Chief Financial Officer, as required pursuant to Section
                  302 of the Sarbanes-Oxley Act of 2002.

      *32.1  --   Certification pursuant to 18 U.S.C. Section 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

      *32.2  --   Certification pursuant to 18 U.S.C. Section 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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


(b) Reports on Form 8-K:

                  (1)      Current Report on Form 8-K filed April 15, 2003
                           announcing the private placement of $50 million of
                           subordinated unsecured notes.

                  (2)      Current Report on Form 8-K filed April 17, 2003
                           announcing the release of Sterling Bancshares'
                           preliminary earnings report for the three months
                           ended March 31, 2003.


                                       26
<PAGE>


                                   SIGNATURES

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

                                       STERLING BANCSHARES, INC.
                                       -------------------------
                                               (Registrant)


DATE: November 14, 2003                BY: /s/ J. Downey Bridgwater
      -----------------                    ----------------------------------
                                           J. DOWNEY BRIDGWATER
                                           PRESIDENT AND
                                           CHIEF EXECUTIVE OFFICER


DATE: November 14, 2003                BY: /s/ Stephen C. Raffaele
      -----------------                    ----------------------------------
                                           STEPHEN C. RAFFAELE
                                           EXECUTIVE VICE PRESIDENT
                                           AND CHIEF FINANCIAL OFFICER



                                       27
<PAGE>



                                  EXHIBIT INDEX

<Table>
<Caption>
       EXHIBIT    DESCRIPTION
       -------    -----------
<S>               <C>
         4.1  --  Fiscal and Paying Agency Agreement dated April 10, 2003
                  between Sterling Bank and Deutsche Bank Trust Company
                  Americas. [Incorporated by reference to Exhibit 4.1 of the
                  Company's Report on Form 8-K filed on April 15, 2003 (File No.
                  000-20750).]

         4.2  --  Form of Global Certificate representing Sterling Bank's 7.375%
                  Subordinated Notes due 2013. [Incorporated by reference to
                  Exhibit 4.2 of the Company's Report on Form 8-K filed on April
                  15, 2003 (File No. 000-20750).]

        10.1  --  Sterling Bancshares, Inc. 2003 Stock Incentive and
                  Compensation Plan. [Incorporated by reference to Exhibit 4.4
                  of the Company's Registration Statement on Form S-8 (File No.
                  333-105307).]

        10.2  --  Purchase Agreement dated April 3, 2003 among Sterling Bank,
                  Lehman Brothers Inc. and Keefe, Bruyette & Woods, Inc.
                  [Incorporated by reference to Exhibit 10.1 of the Company's
                  Report Form 8-K filed on April 15, 2003 (File No. 000-20750).]

          11  --  Statement Regarding Computation of Earnings Per Share
                  (included as Note (2) to Interim Consolidated Financial
                  Statements on page 5 of this Amendment No. 1 to Quarterly
                  Report on Form 10-Q/A).

       *31.1  --  Certification of J. Downey Bridgwater, President and Chief
                  Executive Officer, as required pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.

       *31.2  --  Certification of Stephen C. Raffaele, Executive Vice President
                  and Chief Financial Officer, as required pursuant to Section
                  302 of the Sarbanes-Oxley Act of 2002.

       *32.1  --  Certification pursuant to 18 U.S.C. Section 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

       *32.2  --  Certification pursuant to 18 U.S.C. Section 1350, as adopted
                  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</Table>

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



                                       28