##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D. C. 20549
 
 FORM 10 - Q
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the quarterly period ended September 30, 2005
 o
    
    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.
  Texas
(State or other jurisdiction of
incorporation or organization)
    
    74-2175590
(I.R.S. Employer
Identification Number)2550 North Loop West, Suite 600
Houston, Texas
(Address of principal executive office)
    
    77092
(Zip Code)
 713-466-8300
 þ o
 þ o
 o o




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STERLING BANCSHARES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
 PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets
    
    2Consolidated Statements of Income
    
    3Consolidated Statements of Shareholders Equity
    
    4Consolidated Statements of Cash Flows
    
    5Notes to Consolidated Financial Statements
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    30Item 4.
    
    Controls and Procedures
    
    30PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    30Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    30Item 3.
    
    Defaults Upon Senior Securities
    
    30Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    30Item 5.
    
    Other Information
    
    30Item 6.
    
    Exhibits
    
    30SIGNATURES


    
    32Agreement and Plan of MergerNon-Compete Agreement - Max W. WellsCertification of President and CEO Pursuant to Section 302Certification of Executive VP and CFO Pursuant to Section 302Certification Pursuant to Section 906Certification Pursuant to Section 906
  1




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 STERLING BANCSHARES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (UNAUDITED)
 (In thousands, except share amounts)
 September 30,
    
    
    December 31,2005
    
    
    2004ASSETSCash and cash equivalents
    
    $
    136,391
    
    
    $
    88,439Interest-bearing deposits in financial institutions
    
    
    199
    
    
    
    595Trading assets
    
    
    21,019
    
    
    
    36,720Available-for-sale securities, at fair value
    
    
    520,381
    
    
    
    540,704Held-to-maturity securities, at amortized cost
    
    
    114,819
    
    
    
    117,414Loans held for sale
    
    
    10,779
    
    
    
    6,881Loans held for investment
    
    
    2,689,745
    
    
    
    2,338,096Total loans
    
    
    2,700,524
    
    
    
    2,344,977Allowance for loan losses
    
    
    (31,227
    )
    
    
    (29,406
    )Loans, net
    
    
    2,669,297
    
    
    
    2,315,571Premises and equipment, net
    
    
    38,863
    
    
    
    40,171Real estate acquired by foreclosure
    
    
    635
    
    
    
    1,536Goodwill
    
    
    84,490
    
    
    
    62,480Core deposit intangibles, net
    
    
    3,756
    
    
    
    1,839Accrued interest receivable
    
    
    14,443
    
    
    
    11,964Other assets
    
    
    125,731
    
    
    
    119,463TOTAL ASSETS
    
    $
    3,730,024
    
    
    $
    3,336,896LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIES:Deposits:Noninterest-bearing demand
    
    $
    1,031,366
    
    
    $
    884,017Interest-bearing demand
    
    
    974,629
    
    
    
    970,281Certificates and other time deposits
    
    
    763,014
    
    
    
    589,669Total deposits
    
    
    2,769,009
    
    
    
    2,443,967Short-term borrowings
    
    
    473,050
    
    
    
    420,575Subordinated debt
    
    
    46,635
    
    
    
    47,162Junior subordinated debt
    
    
    82,475
    
    
    
    82,475Accrued interest payable and other liabilities
    
    
    29,675
    
    
    
    29,545Total liabilities
    
    
    3,400,844
    
    
    
    3,023,724COMMITMENTS AND CONTINGENCIES
    
    
    
    
    
    
    SHAREHOLDERS EQUITY:Preferred stock, $1 par value, 1,000,000 shares authorized, no shares
issued and outstanding at September 30, 2005 and December 31, 2004, respectively
    
    
    
    
    
    
    Common stock, $1 par value, 100,000,000 shares authorized, 45,391,760 and 45,068,048
issued and outstanding at September 30, 2005 and December 31, 2004, respectively
    
    
    45,392
    
    
    
    45,068Capital surplus
    
    
    57,905
    
    
    
    54,522Retained earnings
    
    
    230,631
    
    
    
    213,814Accumulated other comprehensive loss, net of tax
    
    
    (4,748
    )
    
    
    (232
    )Total shareholders equity
    
    
    329,180
    
    
    
    313,172TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    3,730,024
    
    
    $
    3,336,896
 See Notes to Consolidated Financial Statements.
 2




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##### Table of Contents



STERLING BANCSHARES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 (UNAUDITED)
 (In thousands, except per share amounts)
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2005
    
    2004
    
    
    2005
    
    2004Interest income:Loans, including fees
    
    $
    47,248
    
    
    $
    34,635
    
    
    $
    130,763
    
    
    $
    100,892Securities:Taxable
    
    
    6,404
    
    
    
    5,560
    
    
    
    18,904
    
    
    
    15,557Non-taxable
    
    
    604
    
    
    
    520
    
    
    
    1,844
    
    
    
    1,439Trading assets
    
    
    259
    
    
    
    1,084
    
    
    
    893
    
    
    
    3,537Federal funds sold
    
    
    59
    
    
    
    25
    
    
    
    218
    
    
    
    68Deposits in financial institutions
    
    
    24
    
    
    
    13
    
    
    
    39
    
    
    
    44Total interest income
    
    
    54,598
    
    
    
    41,837
    
    
    
    152,661
    
    
    
    121,537Interest expense:Demand and savings deposits
    
    
    2,145
    
    
    
    1,239
    
    
    
    5,772
    
    
    
    3,272Certificates and other time deposits
    
    
    5,572
    
    
    
    3,006
    
    
    
    13,613
    
    
    
    9,646Short-term borrowings
    
    
    4,498
    
    
    
    1,047
    
    
    
    10,857
    
    
    
    2,314Subordinated debt
    
    
    950
    
    
    
    704
    
    
    
    2,645
    
    
    
    1,971Junior subordinated debt
    
    
    1,746
    
    
    
    1,646
    
    
    
    5,158
    
    
    
    4,884Total interest expense
    
    
    14,911
    
    
    
    7,642
    
    
    
    38,045
    
    
    
    22,087Net interest income
    
    
    39,687
    
    
    
    34,195
    
    
    
    114,616
    
    
    
    99,450Provision for credit losses
    
    
    4,565
    
    
    
    2,115
    
    
    
    11,126
    
    
    
    8,396Net interest income after provision for credit losses
    
    
    35,122
    
    
    
    32,080
    
    
    
    103,490
    
    
    
    91,054Noninterest income:Customer service fees
    
    
    2,840
    
    
    
    3,687
    
    
    
    8,720
    
    
    
    11,503Net gain (loss) on trading assets
    
    
    34
    
    
    
    (216
    )
    
    
    132
    
    
    
    269Net gain on the sale of securities
    
    
    6
    
    
    
    310
    
    
    
    60
    
    
    
    4,581Net gain on the sale of loans
    
    
    626
    
    
    
    418
    
    
    
    1,300
    
    
    
    638Other
    
    
    3,447
    
    
    
    2,572
    
    
    
    9,903
    
    
    
    7,757Total noninterest income
    
    
    6,953
    
    
    
    6,771
    
    
    
    20,115
    
    
    
    24,748Noninterest expense:Salaries and employee benefits
    
    
    16,356
    
    
    
    17,510
    
    
    
    50,475
    
    
    
    52,372Occupancy expense
    
    
    3,841
    
    
    
    3,945
    
    
    
    11,392
    
    
    
    11,285Technology
    
    
    1,409
    
    
    
    1,643
    
    
    
    4,004
    
    
    
    4,568Professional fees
    
    
    1,870
    
    
    
    1,333
    
    
    
    4,796
    
    
    
    3,790Postage, delivery and supplies
    
    
    809
    
    
    
    746
    
    
    
    2,337
    
    
    
    2,437Marketing
    
    
    542
    
    
    
    250
    
    
    
    1,804
    
    
    
    1,175Core deposit intangibles amortization
    
    
    102
    
    
    
    125
    
    
    
    316
    
    
    
    372Acquisition costs
    
    
    831
    
    
    
    
    
    
    
    831
    
    
    
    Other
    
    
    3,514
    
    
    
    3,863
    
    
    
    11,156
    
    
    
    12,434Total noninterest expense
    
    
    29,274
    
    
    
    29,415
    
    
    
    87,111
    
    
    
    88,433Income before income taxes
    
    
    12,801
    
    
    
    9,436
    
    
    
    36,494
    
    
    
    27,369Provision for income taxes
    
    
    4,115
    
    
    
    2,950
    
    
    
    11,534
    
    
    
    8,576Net Income
    
    $
    8,686
    
    
    $
    6,486
    
    
    $
    24,960
    
    
    $
    18,793Earnings per share:Basic
    
    $
    0.19
    
    
    $
    0.14
    
    
    $
    0.55
    
    
    $
    0.42Diluted
    
    $
    0.19
    
    
    $
    0.14
    
    
    $
    0.55
    
    
    $
    0.42
 See Notes to Consolidated Financial Statements.
 3




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##### Table of Contents



STERLING BANCSHARES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (UNAUDITED)
 (In thousands)
 Accumulated OtherPreferred Stock
    
    
    Common Stock
    
    
    Capital
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Surplus
    
    
    Earnings
    
    
    Income (Loss)
    
    
    TotalBALANCE AT JANUARY 1, 2004
    
    
    20
    
    
    $
    20
    
    
    
    44,642
    
    
    $
    44,642
    
    
    $
    48,953
    
    
    $
    197,819
    
    
    $
    1,162
    
    
    $
    292,596Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,793
    
    
    
    

    
    
    
    18,793Net change in unrealized gains and losses on
available-for-sale securities, net of taxes of ($352)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (654
    )
    
    
    (654
    )Less: Reclassification adjustment for gains
included in net income, net of taxes of $248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    462
    
    
    
    462Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,601Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    275
    
    
    
    275
    
    
    
    2,612
    
    
    
    
    
    
    
    
    
    
    
    2,887Cash dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,719
    )
    
    
    
    
    
    
    (6,719
    )BALANCE AT SEPTEMBER 30, 2004
    
    
    20
    
    
    $
    20
    
    
    
    44,917
    
    
    $
    44,917
    
    
    $
    51,565
    
    
    $
    209,893
    
    
    $
    970
    
    
    $
    307,365BALANCE AT JANUARY 1, 2005
    
    
    
    
    
    $
    
    
    
    
    45,068
    
    
    $
    45,068
    
    
    $
    54,522
    
    
    $
    213,814
    
    
    $
    (232
    )
    
    $
    313,172Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,960
    
    
    
    
    
    
    
    24,960Net change in unrealized gains and losses on
available-for-sale securities, net of taxes of ($2,452)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,477
    )
    
    
    (4,477
    )Less: Reclassification adjustment for gains
included in net income, net of taxes of ($21)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (39
    )
    
    
    (39
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,444Issuance of common stock
    
    
    
    
    
    
    
    
    
    
    324
    
    
    
    324
    
    
    
    3,383
    
    
    
    
    
    
    
    
    
    
    
    3,707Cash dividends paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,143
    )
    
    
    
    
    
    
    (8,143
    )BALANCE AT SEPTEMBER 30, 2005
    
    
    
    
    
    $
    
    
    
    
    45,392
    
    
    $
    45,392
    
    
    $
    57,905
    
    
    $
    230,631
    
    
    $
    (4,748
    )
    
    $
    329,180
 See Notes to Consolidated Financial Statements.
 4




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##### Table of Contents



STERLING BANCSHARES, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 (In thousands)
 Nine Months Ended September 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    24,960
    
    
    $
    18,793Adjustments to reconcile net income to net cash provided by operating activities:Amortization and accretion of premiums and discounts on securities, net
    
    
    2,386
    
    
    
    5,430Net gain on the sale of securities
    
    
    (60
    )
    
    
    (4,581
    )Net gain on the sale of bank assets
    
    
    (244
    )
    
    
    (93
    )Net gain on trading assets
    
    
    (132
    )
    
    
    (269
    )Net gain on sale of loans
    
    
    (1,300
    )
    
    
    (638
    )Provision for credit losses
    
    
    11,126
    
    
    
    8,396Writedowns, less gains on sale, of real estate acquired by foreclosure
    
    
    (11
    )
    
    
    (18
    )Writedowns of premises and equipment
    
    
    
    
    
    
    1,109Depreciation and amortization
    
    
    5,680
    
    
    
    6,917Proceeds from sales of trading assets
    
    
    134,837
    
    
    
    340,809Purchases of trading assets
    
    
    (150,484
    )
    
    
    (313,480
    )Proceeds from principal paydowns of trading securities
    
    
    27,301
    
    
    
    2,945Net (increase) decrease in loans held for sale
    
    
    (2,901
    )
    
    
    1,923Net increase in accrued interest receivable and other assets
    
    
    (6,259
    )
    
    
    (4,637
    )Net decrease in accrued interest payable and other liabilities
    
    
    (1,162
    )
    
    
    (15,007
    )Net cash provided by operating activities
    
    
    43,737
    
    
    
    47,599CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from the maturities or calls and paydowns of held-to-maturity securities
    
    
    17,371
    
    
    
    6,013Proceeds from the sale of available-for-sale securities
    
    
    60,049
    
    
    
    161,332Proceeds from maturities or calls and paydowns of available-for-sale securities
    
    
    110,322
    
    
    
    108,348Purchases of available-for-sale securities
    
    
    (151,972
    )
    
    
    (260,501
    )Purchases of held-to-maturity securities
    
    
    (14,916
    )
    
    
    (42,034
    )Net increase in loans held for investment
    
    
    (338,783
    )
    
    
    (85,909
    )Proceeds from sale of real estate acquired by foreclosure
    
    
    1,953
    
    
    
    2,482Proceeds from sale of land held for sale and others
    
    
    615
    
    
    
    729Net decrease in interest-bearing deposits in financial institutions
    
    
    396
    
    
    
    183Purchase of
Prestonwood Bancshares, Inc. (including transaction costs)
    
    
    (34,638
    )
    
    
    Cash and cash equivalents acquired with Prestonwood Bancshares, Inc.
    
    
    49,035
    
    
    
    Proceeds from sale of loans held for investment
    
    
    52,368
    
    
    
    Proceeds from sale of premises and equipment
    
    
    353
    
    
    
    618Purchase of premises and equipment
    
    
    (3,314
    )
    
    
    (4,394
    )Net cash used in investing activities
    
    
    (251,161
    )
    
    
    (113,133
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase (decrease) in deposits
    
    
    207,337
    
    
    
    (26,186
    )Net increase in short-term borrowings
    
    
    52,475
    
    
    
    53,590Proceeds from issuance of common stock
    
    
    3,707
    
    
    
    2,887Dividends paid
    
    
    (8,143
    )
    
    
    (6,719
    )Net cash provided by financing activities
    
    
    255,376
    
    
    
    23,572NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    47,952
    
    
    
    (41,962
    )CASH AND CASH EQUIVALENTS:Beginning of period
    
    
    88,439
    
    
    
    136,764End of period
    
    $
    136,391
    
    
    $
    94,802Supplemental information:Income taxes paid
    
    $
    15,143
    
    
    $
    28,009Interest paid
    
    
    36,223
    
    
    
    21,460Noncash
investing and financing activitiesAcquisitions
of real estate through foreclosure of collateral
    
    
    1,041
    
    
    
    4,071
 See Notes to Consolidated Financial Statements.
 5




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##### Table of Contents



STERLING BANCSHARES, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 1. ACCOUNTING POLICIES
 Basis of Presentation
  Recent Accounting Standards
 The Meaning of Other-Than-Temporary Impairment
and Its Application to Certain Investments Accounting for Certain Investments in Debt and Equity
Securities Accounting for Certain Investments Held by Not-for-Profit Organizations The Equity Method of Accounting for Investments in Common Stock
 SFAS No. 123R, Share-Based Payment (Revised 2004)
  Accounting
Changes and Error Corrections
 6




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##### Table of Contents



Stock-Based Compensation
   Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income, as reported
    
    $
    8,686
    
    
    $
    6,486
    
    
    $
    24,960
    
    
    $
    18,793Add: Stock-based employee compensation expense
included in reported net income, net of related taxes
    
    
    105
    
    
    
    72
    
    
    
    347
    
    
    
    440Less: Total stock-based employee compensation
expense determined under fair value-based method,
net of related taxes
    
    
    (226
    )
    
    
    (221
    )
    
    
    (739
    )
    
    
    (979
    )Pro-forma net income
    
    $
    8,565
    
    
    $
    6,337
    
    
    $
    24,568
    
    
    $
    18,254Earnings per share:Basic  as reported
    
    $
    0.19
    
    
    $
    0.14
    
    
    $
    0.55
    
    
    $
    0.42Basic  pro-forma
    
    $
    0.19
    
    
    $
    0.14
    
    
    $
    0.54
    
    
    $
    0.41Diluted  as reported
    
    $
    0.19
    
    
    $
    0.14
    
    
    $
    0.55
    
    
    $
    0.42Diluted  pro-forma
    
    $
    0.19
    
    
    $
    0.14
    
    
    $
    0.54
    
    
    $
    0.40
  2. ACQUISITIONS
  7




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##### Table of Contents



September 30,2005Cash and cash equivalents
    
    $
    49,035Available-for-sale securities
    
    
    3,029Loans held for investment
    
    
    75,662Allowance for loan losses
    
    
    (761
    )Premises and equipment, net
    
    
    990Accrued interest receivable
    
    
    351Core deposit intangibles, net
    
    
    2,233Goodwill
    
    
    22,010Other assets
    
    
    201Total assets acquired
    
    
    152,750Deposits
    
    
    (117,705
    )Accrued interest payable and other liabilities
    
    
    (407
    )Total liabilities assumed
    
    
    (118,112
    )Net assets acquired
    
    $
    34,638
  8




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##### Table of Contents



3. SECURITIES
  September 30, 2005Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-SaleObligations of the U.S Treasury and other
U.S. government agencies
    
    $
    10,242
    
    
    $
    
    
    
    $
    (92
    )
    
    $
    10,150Obligations of states of the U.S. and
political subdivisions
    
    
    3,308
    
    
    
    44
    
    
    
    (2
    )
    
    
    3,350Mortgage-backed securities and collateralized
mortgage obligations
    
    
    499,051
    
    
    
    428
    
    
    
    (7,726
    )
    
    
    491,753Other securities
    
    
    15,085
    
    
    
    367
    
    
    
    (324
    )
    
    
    15,128Total
    
    $
    527,686
    
    
    $
    839
    
    
    $
    (8,144
    )
    
    $
    520,381Held-to-MaturityObligations
of states of the U.S. and political subdivisions
    
    $
    58,325
    
    
    $
    1,004
    
    
    $
    (232
    )
    
    $
    59,097Mortgage-backed securities and collateralized
mortgage obligations
    
    
    56,494
    
    
    
    1
    
    
    
    (841
    )
    
    
    55,654Total
    
    $
    114,819
    
    
    $
    1,005
    
    
    $
    (1,073
    )
    
    $
    114,751
 December 31, 2004Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueAvailable-for-SaleObligations of the U.S Treasury and other
U.S. government agencies
    
    $
    8,254
    
    
    $
    
    
    
    $
    (60
    )
    
    $
    8,194Obligations of states of the U.S. and
political subdivisions
    
    
    4,035
    
    
    
    99
    
    
    
    (1
    )
    
    
    4,133Mortgage-backed securities and collateralized
mortgage obligations
    
    
    516,865
    
    
    
    2,112
    
    
    
    (2,652
    )
    
    
    516,325Other securities
    
    
    11,908
    
    
    
    354
    
    
    
    (210
    )
    
    
    12,052Total
    
    $
    541,062
    
    
    $
    2,565
    
    
    $
    (2,923
    )
    
    $
    540,704Held-to-MaturityObligations of states of the U.S. and
political subdivisions
    
    $
    61,956
    
    
    $
    1,928
    
    
    $
    (71
    )
    
    $
    63,813Mortgage-backed securities and collateralized
mortgage obligations
    
    
    55,458
    
    
    
    57
    
    
    
    (306
    )
    
    
    55,209Total
    
    $
    117,414
    
    
    $
    1,985
    
    
    $
    (377
    )
    
    $
    119,022
 9




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##### Table of Contents



Available-for-Sale
    
    
    Held-to-MaturityAmortized
    
    
    
    
    
    
    AmortizedCost
    
    
    Fair Value
    
    
    Cost
    
    
    Fair ValueDue in one year or less
    
    $
    4,972
    
    
    $
    4,963
    
    
    $
    5,295
    
    
    $
    5,339Due after one year through five years
    
    
    7,434
    
    
    
    7,370
    
    
    
    25,131
    
    
    
    25,896Due after five years through ten years
    
    
    1,144
    
    
    
    1,167
    
    
    
    27,328
    
    
    
    27,297Due after ten years
    
    
    
    
    
    
    
    
    
    
    571
    
    
    
    565Mortgage-backed securities and
collateralized mortgage obligations
    
    
    499,051
    
    
    
    491,753
    
    
    
    56,494
    
    
    
    55,654Other securities
    
    
    15,085
    
    
    
    15,128
    
    
    
    
    
    
    
    Total
    
    $
    527,686
    
    
    $
    520,381
    
    
    $
    114,819
    
    
    $
    114,751
  Three months ended September 30,
    
    Nine months ended September 30,2005
    
    2004
    
    2005
    
    2004Proceeds from sales and calls
    
    $
    15,792
    
    
    $
    15,595
    
    
    $
    60,049
    
    
    $
    161,332Gross realized gains
    
    
    63
    
    
    
    310
    
    
    
    206
    
    
    
    5,434Gross realized losses
    
    
    (57
    )
    
    
    
    
    
    
    (146
    )
    
    
    (853
    )
  September 30, 2005Less than 12 Months
    
    
    More than 12 MonthsGross
    
    
    
    
    
    
    
    
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    
    
    
    
    Amortized
    
    
    UnrealizedCost
    
    
    Losses
    
    
    Fair Value
    
    
    Cost
    
    
    Losses
    
    
    Fair ValueAvailable-for-SaleObligations of the U.S Treasury and other
U.S. government agencies
    
    $
    6,519
    
    
    $
    (73
    )
    
    $
    6,446
    
    
    $
    1,196
    
    
    $
    (19
    )
    
    $
    1,177Obligations of states of the U.S. and
political subdivisions
    
    
    368
    
    
    
    (2
    )
    
    
    366
    
    
    
    
    
    
    
    
    
    
    
    Mortgage-backed securities and collateralized
mortgage obligations
    
    
    399,673
    
    
    
    (5,365
    )
    
    
    394,308
    
    
    
    99,378
    
    
    
    (2,361
    )
    
    
    97,017Other securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,178
    
    
    
    (324
    )
    
    
    5,854Total
    
    $
    406,560
    
    
    $
    (5,440
    )
    
    $
    401,120
    
    
    $
    106,752
    
    
    $
    (2,704
    )
    
    $
    104,048Held-to-MaturityObligations of states of the U.S. and
political subdivisions
    
    $
    20,967
    
    
    $
    (232
    )
    
    $
    20,735
    
    
    $
    
    
    
    $
    
    
    
    $
    Mortgage-backed securities and collateralized
mortgage obligations
    
    
    56,346
    
    
    
    (841
    )
    
    
    55,505
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    77,313
    
    
    $
    (1,073
    )
    
    $
    76,240
    
    
    $
    
    
    
    $
    
    
    
    $
    
    10




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##### Table of Contents



4. LOANS
  September 30,
    
    
    December 31,2005
    
    
    2004Amount
    
    
    %
    
    
    Amount
    
    
    %Loans held for sale
    
    $
    10,779
    
    
    
    0.4
    %
    
    $
    6,881
    
    
    
    0.3
    %Loans held for investmentDomesticCommercial and industrial
    
    
    751,372
    
    
    
    27.8
    %
    
    
    682,209
    
    
    
    29.1
    %Real estate:Commercial
    
    
    1,188,393
    
    
    
    44.0
    %
    
    
    1,043,960
    
    
    
    44.6
    %Construction
    
    
    447,260
    
    
    
    16.6
    %
    
    
    329,982
    
    
    
    14.1
    %Residential mortgage
    
    
    195,862
    
    
    
    7.3
    %
    
    
    183,839
    
    
    
    7.8
    %Consumer/other
    
    
    78,272
    
    
    
    2.9
    %
    
    
    72,997
    
    
    
    3.1
    %ForeignCommercial and industrial
    
    
    25,225
    
    
    
    0.9
    %
    
    
    21,785
    
    
    
    0.9
    %Other loans
    
    
    3,361
    
    
    
    0.1
    %
    
    
    3,324
    
    
    
    0.1
    %Total loans held for investment
    
    
    2,689,745
    
    
    
    99.6
    %
    
    
    2,338,096
    
    
    
    99.7
    %Total loans
    
    $
    2,700,524
    
    
    
    100.0
    %
    
    $
    2,344,977
    
    
    
    100.0
    %
  Due AfterOne YearDue in One
    
    
    Through Five
    
    
    Due AfterYear or Less
    
    
    Years
    
    
    Five Years
    
    
    TotalCommercial and industrial
    
    $
    600,246
    
    
    $
    140,497
    
    
    $
    10,629
    
    
    $
    751,372Real estate  commercial
    
    
    750,896
    
    
    
    332,451
    
    
    
    105,046
    
    
    
    1,188,393Real estate  construction
    
    
    373,828
    
    
    
    58,464
    
    
    
    14,968
    
    
    
    447,260Foreign loans
    
    
    10,489
    
    
    
    18,090
    
    
    
    7
    
    
    
    28,586Total
    
    $
    1,735,459
    
    
    $
    549,502
    
    
    $
    130,650
    
    
    $
    2,415,611Loans with a fixed interest rate
    
    $
    132,515
    
    
    $
    489,066
    
    
    $
    113,030
    
    
    $
    734,611Loans with a floating interest rate
    
    
    1,602,944
    
    
    
    60,436
    
    
    
    17,620
    
    
    
    1,681,000Total
    
    $
    1,735,459
    
    
    $
    549,502
    
    
    $
    130,650
    
    
    $
    2,415,611
    11




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##### Table of Contents



5. ALLOWANCE FOR CREDIT LOSSES
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Allowance for loan losses at beginning of the period
    
    $
    32,209
    
    
    $
    26,129
    
    
    $
    29,407
    
    
    $
    30,722Loans charged-off
    
    
    6,688
    
    
    
    2,126
    
    
    
    12,322
    
    
    
    13,337Loan recoveries
    
    
    (595
    )
    
    
    (641
    )
    
    
    (2,391
    )
    
    
    (2,178
    )Net loans charged-off
    
    
    6,093
    
    
    
    1,485
    
    
    
    9,931
    
    
    
    11,159Allowance for credit losses associated with acquired institutions
    
    
    761
    
    
    
    
    
    
    
    761
    
    
    
    Provision for loan losses
    
    
    4,350
    
    
    
    2,179
    
    
    
    10,991
    
    
    
    7,260Allowance for loan losses at end of the period
    
    $
    31,227
    
    
    $
    26,823
    
    
    $
    31,227
    
    
    $
    26,823Reserve for losses on unfunded lending commitments at
beginning of period
    
    
    746
    
    
    
    1,200
    
    
    
    826
    
    
    
    Provision for losses on unfunded lending commitments
    
    
    215
    
    
    
    (64
    )
    
    
    135
    
    
    
    1,136Reserve for losses on unfunded lending commitments at
end of period
    
    
    961
    
    
    
    1,136
    
    
    
    961
    
    
    
    1,136Total allowance for credit losses
    
    $
    32,188
    
    
    $
    27,959
    
    
    $
    32,188
    
    
    $
    27,959
  6. GOODWILL AND OTHER INTANGIBLES
  Houston
    
    
    San Antonio
    
    
    Dallas
    
    
    TotalBalance, January 1, 2004
    
    $
    29,613
    
    
    $
    27,658
    
    
    $
    5,662
    
    
    $
    62,933Plaza Bank goodwill
adjustments
    
    
    
    
    
    
    (453
    )
    
    
    
    
    
    
    (453
    )Balance, December
31, 2004
    
    
    29,613
    
    
    
    27,205
    
    
    
    5,662
    
    
    
    62,480Prestonwood Bancshares
acquisition
    
    
    
    
    
    
    
    
    
    
    22,010
    
    
    
    22,010Balance, September
30, 2005
    
    $
    29,613
    
    
    $
    27,205
    
    
    $
    27,672
    
    
    $
    84,490
  12




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##### Table of Contents



CoreDepositIntangiblesBalance, January 1, 2004
    
    $
    2,326Amortization expense
    
    
    (487
    )Balance, December 31, 2004
    
    
    1,839Prestonwood Bancshares acquisition
    
    
    2,233Amortization expense
    
    
    (316
    )Balance, September 30, 2005
    
    $
    3,756
 7. EARNINGS PER COMMON SHARE
  Three months ended September 30,
    
    
    Nine months ended September 30,2005
    
    2004
    
    
    2005
    
    2004Net income
    
    $
    8,686
    
    
    $
    6,486
    
    
    $
    24,960
    
    
    $
    18,793Basic:Weighted average shares outstanding
    
    
    45,362
    
    
    
    44,881
    
    
    
    45,255
    
    
    
    44,793Diluted:Add incremental shares for:Assumed exercise of outstanding options
    
    
    498
    
    
    
    459
    
    
    
    458
    
    
    
    446Assumed conversion of preferred stock
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    20Total
    
    
    45,860
    
    
    
    45,360
    
    
    
    45,713
    
    
    
    45,259Earnings per share:Basic
    
    $
    0.19
    
    
    $
    0.14
    
    
    $
    0.55
    
    
    $
    0.42Diluted
    
    $
    0.19
    
    
    $
    0.14
    
    
    $
    0.55
    
    
    $
    0.42
  8. COMMITMENTS AND CONTINGENCIES
 Leases 
 Litigation 
 Severance
and non-competition agreements 
 13




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##### Table of Contents



9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
   September 30,
    
    December 31,2005
    
    2004Commitments to extend credit
    
    $
    771,034
    
    
    $
    657,740Standby letters of credit
    
    
    49,297
    
    
    
    28,435
    10. REGULATORY MATTERS
 Capital requirements 
   14




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##### Table of Contents



To Be Categorized asWell Capitalized UnderFor Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(In thousands, except percentage amounts)CONSOLIDATED:As of September 30, 2005:Total capital (to risk weighted assets)
    
    $
    404,294
    
    
    
    12.3
    %
    
    $
    262,104
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    N/ATier 1 capital (to risk weighted
assets)
    
    
    325,472
    
    
    
    9.9
    %
    
    
    131,052
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/ATier 1 capital (to average assets)
    
    
    325,472
    
    
    
    9.2
    %
    
    
    141,345
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/AAs of December 31, 2004:Total capital (to risk weighted assets)
    
    $
    406,343
    
    
    
    14.6
    %
    
    $
    223,457
    
    
    
    8.0
    %
    
    
    N/A
    
    
    
    N/ATier 1 capital (to risk weighted
assets)
    
    
    328,948
    
    
    
    11.8
    %
    
    
    111,729
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/ATier 1 capital (to average assets)
    
    
    328,948
    
    
    
    10.1
    %
    
    
    129,625
    
    
    
    4.0
    %
    
    
    N/A
    
    
    
    N/ASTERLING BANK:As of September 30, 2005:Total capital (to risk weighted assets)
    
    $
    388,474
    
    
    
    12.2
    %
    
    $
    255,286
    
    
    
    8.0
    %
    
    $
    319,108
    
    
    
    10.0
    %Tier 1 capital (to risk weighted
assets)
    
    
    310,413
    
    
    
    9.7
    %
    
    
    127,643
    
    
    
    4.0
    %
    
    
    191,465
    
    
    
    6.0
    %Tier 1 capital (to average assets)
    
    
    310,413
    
    
    
    8.7
    %
    
    
    142,027
    
    
    
    4.0
    %
    
    
    177,534
    
    
    
    5.0
    %As of December 31, 2004:Total capital (to risk weighted assets)
    
    $
    399,808
    
    
    
    14.3
    %
    
    $
    222,987
    
    
    
    8.0
    %
    
    $
    278,734
    
    
    
    10.0
    %Tier 1 capital (to risk weighted
assets)
    
    
    322,413
    
    
    
    11.6
    %
    
    
    111,494
    
    
    
    4.0
    %
    
    
    167,241
    
    
    
    6.0
    %Tier 1 capital (to average assets)
    
    
    322,413
    
    
    
    9.9
    %
    
    
    129,387
    
    
    
    4.0
    %
    
    
    161,733
    
    
    
    5.0
    %THE OAKS BANK & TRUSTAs of September 30, 2005:Total capital (to risk weighted assets)
    
    $
    11,156
    
    
    
    12.9
    %
    
    $
    6,895
    
    
    
    8.0
    %
    
    $
    8,619
    
    
    
    10.0
    %Tier 1 capital (to risk weighted
assets)
    
    
    10,395
    
    
    
    12.1
    %
    
    
    3,447
    
    
    
    4.0
    %
    
    
    5,171
    
    
    
    6.0
    %Tier 1 capital (to average assets)
    
    
    10,395
    
    
    
    13.3
    %
    
    
    3,119
    
    
    
    4.0
    %
    
    
    3,898
    
    
    
    5.0
    %
  Dividend restrictions 
 15




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
   
    
    general business and economic conditions in the markets we serve may be less favorable
than anticipated which could decrease the demand for loan, deposit and other financial
services and increase loan delinquencies and defaults;
    
    our ability to integrate acquisitions and realize expected cost savings and revenue
enhancements from acquisitions;
    
    changes in market rates and prices may adversely impact the value of securities, loans,
deposits and other financial instruments and the interest rate sensitivity of our balance
sheet;
    
    our liquidity requirements could be adversely affected by changes in our assets and
liabilities;
    
    the effect of legislative or regulatory developments including changes in laws
concerning taxes, banking, securities, insurance and other aspects of the financial
securities industry;
    
    the effect of weather including recent and future hurricanes that may impact the
Companys operations and the Companys customers;
    
    competitive factors among financial services organizations, including product and
pricing pressures and our ability to attract, develop and retain qualified banking
professionals;
    
    the effect of changes in accounting policies and practices, as may be adopted by the
Financial Accounting Standards Board, the Securities and Exchange Commission, the Public
Company Accounting Oversight Board and other regulatory agencies; and
    
    the effect of fiscal and governmental policies of the United States federal government.
   OVERVIEW
   16




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES
    RECENT ACCOUNTING STANDARDS
 The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments Accounting for Certain Investments in Debt and Equity
Securities for Certain Investments Held by Not-for-Profit Organizations, The Equity Method of Accounting for Investments in Common Stock
 SFAS No. 123R, Share-Based Payment (Revised 2004)
  17




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##### Table of Contents



Accounting
Changes and Error Corrections
 18




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##### Table of Contents



SELECTED FINANCIAL DATA
 Three Months Ended
    
    Nine Months Ended
    
    Year EndedSeptember 30,
    
    September 30,
    December 31,2005
    
    2004
    
    2005
    
    2004
    
    2004(Dollars and shares in thousands, except for per share amounts)INCOME STATEMENT DATA:Net interest income
    
    $
    39,687
    
    
    $
    34,195
    
    
    $
    114,616
    
    
    $
    99,450
    
    
    $
    135,160Provision for credit losses
    
    
    4,565
    
    
    
    2,115
    
    
    
    11,126
    
    
    
    8,396
    
    
    
    12,250Noninterest income
    
    
    6,953
    
    
    
    6,771
    
    
    
    20,115
    
    
    
    24,748
    
    
    
    30,900Noninterest expense
    
    
    29,274
    
    
    
    29,415
    
    
    
    87,111
    
    
    
    88,433
    
    
    
    119,363Income before income taxes
    
    
    12,801
    
    
    
    9,436
    
    
    
    36,494
    
    
    
    27,369
    
    
    
    34,447Net income
    
    
    8,686
    
    
    
    6,486
    
    
    
    24,960
    
    
    
    18,793
    
    
    
    24,963BALANCE SHEET DATA (at period-end):Total assets
    
    $
    3,730,024
    
    
    $
    3,235,185
    
    
    $
    3,730,024
    
    
    $
    3,235,185
    
    
    $
    3,336,896Total loans
    
    
    2,700,524
    
    
    
    2,226,433
    
    
    
    2,700,524
    
    
    
    2,226,433
    
    
    
    2,344,977Allowance for loan losses
    
    
    31,227
    
    
    
    26,823
    
    
    
    31,227
    
    
    
    26,823
    
    
    
    29,406Total securities
    
    
    635,200
    
    
    
    609,789
    
    
    
    635,200
    
    
    
    609,789
    
    
    
    658,118Trading assets
    
    
    21,019
    
    
    
    123,880
    
    
    
    21,019
    
    
    
    123,880
    
    
    
    36,720Total deposits
    
    
    2,769,009
    
    
    
    2,392,183
    
    
    
    2,769,009
    
    
    
    2,392,183
    
    
    
    2,443,967Short-term borrowings
    
    
    473,050
    
    
    
    377,750
    
    
    
    473,050
    
    
    
    377,750
    
    
    
    420,575Subordinated debt
    
    
    46,635
    
    
    
    47,360
    
    
    
    46,635
    
    
    
    47,360
    
    
    
    47,162Junior subordinated debt
    
    
    82,475
    
    
    
    82,475
    
    
    
    82,475
    
    
    
    82,475
    
    
    
    82,475Shareholders equity
    
    
    329,180
    
    
    
    307,365
    
    
    
    329,180
    
    
    
    307,365
    
    
    
    313,172COMMON SHARE DATA:Earnings per share (1)Basic
    
    $
    0.19
    
    
    $
    0.14
    
    
    $
    0.55
    
    
    $
    0.42
    
    
    $
    0.56Diluted
    
    
    0.19
    
    
    
    0.14
    
    
    
    0.55
    
    
    
    0.42
    
    
    
    0.55Shares used in computing earnings per common shareBasic
    
    
    45,362
    
    
    
    44,881
    
    
    
    45,255
    
    
    
    44,793
    
    
    
    44,839Diluted
    
    
    45,860
    
    
    
    45,360
    
    
    
    45,713
    
    
    
    45,259
    
    
    
    45,278End of period common shares outstanding
    
    
    45,392
    
    
    
    44,917
    
    
    
    45,392
    
    
    
    44,917
    
    
    
    45,068Book value per common share at period-endTotal
    
    $
    7.25
    
    
    $
    6.84
    
    
    $
    7.25
    
    
    $
    6.84
    
    
    $
    6.95Tangible
    
    
    5.31
    
    
    
    5.40
    
    
    
    5.31
    
    
    
    5.40
    
    
    
    5.52Cash dividends paid per common share
    
    
    0.060
    
    
    
    0.050
    
    
    
    0.179
    
    
    
    0.150
    
    
    
    0.200Common stock dividend payout ratio
    
    
    31.33
    %
    
    
    34.59
    %
    
    
    32.62
    %
    
    
    35.74
    %
    
    
    35.91
    %SELECTED PERFORMANCE RATIOS AND OTHER DATA:Return on average common equity (2)
    
    
    10.41
    %
    
    
    8.51
    %
    
    
    10.28
    %
    
    
    8.36
    %
    
    
    8.23
    %Return on average assets (2)
    
    
    0.96
    %
    
    
    0.82
    %
    
    
    0.95
    %
    
    
    0.80
    %
    
    
    0.78
    %Net interest margin
    
    
    4.78
    %
    
    
    4.74
    %
    
    
    4.79
    %
    
    
    4.62
    %
    
    
    4.64
    %Efficiency ratio
    
    
    62.77
    %
    
    
    71.80
    %
    
    
    64.66
    %
    
    
    71.20
    %
    
    
    71.88
    %Full-time equivalent employees
    
    
    984
    
    
    
    994
    
    
    
    984
    
    
    
    994
    
    
    
    961Number of banking offices
    
    
    41
    
    
    
    36
    
    
    
    41
    
    
    
    36
    
    
    
    36LIQUIDITY AND CAPITAL RATIOS:Average loans to average deposits
    
    
    99.70
    %
    
    
    90.36
    %
    
    
    98.05
    %
    
    
    88.41
    %
    
    
    89.32
    %Period-end shareholders equity to total assets
    
    
    8.83
    %
    
    
    9.50
    %
    
    
    8.83
    %
    
    
    9.50
    %
    
    
    9.39
    %Average shareholders equity to average assets
    
    
    9.19
    %
    
    
    9.67
    %
    
    
    9.26
    %
    
    
    9.54
    %
    
    
    9.52
    %Period-end tangible capital to total tangible assets
    
    
    6.62
    %
    
    
    7.66
    %
    
    
    6.62
    %
    
    
    7.66
    %
    
    
    7.61
    %Tier 1 capital to risk-weighted assets
    
    
    9.93
    %
    
    
    12.34
    %
    
    
    9.93
    %
    
    
    12.34
    %
    
    
    11.78
    %Total capital to risk-weighted assets
    
    
    12.34
    %
    
    
    15.23
    %
    
    
    12.34
    %
    
    
    15.23
    %
    
    
    14.55
    %Tier 1 leverage ratio (Tier 1 capital to average assets)
    
    
    9.21
    %
    
    
    10.42
    %
    
    
    9.21
    %
    
    
    10.42
    %
    
    
    10.15
    %ASSET QUALITY RATIOS:Period-end
allowance for credit losses to period-end loans
    
    
    1.19
    %
    
    
    1.26
    %
    
    
    1.19
    %
    
    
    1.26
    %
    
    
    1.29
    %Period-end allowance for loan losses to period-end loans
    
    
    1.16
    %
    
    
    1.20
    %
    
    
    1.16
    %
    
    
    1.20
    %
    
    
    1.25
    %Period-end allowance for loan losses to nonperforming loans
    
    
    129.24
    %
    
    
    223.00
    %
    
    
    129.24
    %
    
    
    223.00
    %
    
    
    142.71
    %Nonperforming assets to period-end loans and foreclosed assets
    
    
    0.93
    %
    
    
    0.73
    %
    
    
    0.93
    %
    
    
    0.73
    %
    
    
    0.95
    %Nonperforming loans to period-end loans
    
    
    0.89
    %
    
    
    0.54
    %
    
    
    0.89
    %
    
    
    0.54
    %
    
    
    0.88
    %Nonperforming assets to period-end assets
    
    
    0.67
    %
    
    
    0.50
    %
    
    
    0.67
    %
    
    
    0.50
    %
    
    
    0.67
    %Net charge-offs to average loans (2)
    
    
    0.93
    %
    
    
    0.27
    %
    
    
    0.53
    %
    
    
    0.69
    %
    
    
    0.58
    %
 
 (1)
    
    The calculation of diluted EPS excludes 78,675 and 89,975 options for the three and nine
months ended September 30, 2005, 246,357 and 286,707 options for the three and nine months ended
September 30, 2004 and 218,895 options for the year ended December 31, 2004, which were
antidilutive.(2)
    
    Interim periods annualized 19




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##### Table of Contents



RESULTS OF OPERATIONS
 Net Income 
   Net
Interest Income 
      20




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##### Table of Contents



21




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##### Table of Contents



Three Months Ended September 30,(Dollars in thousands)2005
    
    
    2004Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Yield/Rate
    
    
    Balance
    
    
    Interest
    
    
    Yield/RateInterest-Earning Assets:Loans held for sale (1)
    
    $
    10,788
    
    
    $
    212
    
    
    
    7.80
    %
    
    $
    14,356
    
    
    $
    304
    
    
    
    8.43
    %Loans held for investment (1):Taxable
    
    
    2,579,501
    
    
    
    46,999
    
    
    
    7.23
    %
    
    
    2,158,193
    
    
    
    34,268
    
    
    
    6.32
    %Non-taxable
    
    
    2,316
    
    
    
    37
    
    
    
    6.29
    %
    
    
    3,953
    
    
    
    63
    
    
    
    6.34
    %Securities:Taxable
    
    
    608,671
    
    
    
    6,404
    
    
    
    4.17
    %
    
    
    520,018
    
    
    
    5,560
    
    
    
    4.25
    %Non-taxable
    
    
    62,069
    
    
    
    604
    
    
    
    3.86
    %
    
    
    49,108
    
    
    
    520
    
    
    
    4.21
    %Trading assets
    
    
    24,027
    
    
    
    259
    
    
    
    4.27
    %
    
    
    113,252
    
    
    
    1,084
    
    
    
    3.81
    %Federal funds sold
    
    
    6,983
    
    
    
    59
    
    
    
    3.34
    %
    
    
    6,980
    
    
    
    25
    
    
    
    1.43
    %Deposits in financial institutions
    
    
    2,698
    
    
    
    24
    
    
    
    3.54
    %
    
    
    1,471
    
    
    
    13
    
    
    
    3.58
    %Total interest-earning assets
    
    
    3,297,053
    
    
    
    54,598
    
    
    
    6.57
    %
    
    
    2,867,331
    
    
    
    41,837
    
    
    
    5.80
    %Noninterest-earning assets:Cash and due from banks
    
    
    96,329
    
    
    
    
    
    
    
    
    
    
    
    93,958Premises and equipment, net
    
    
    38,305
    
    
    
    
    
    
    
    
    
    
    
    43,290Other assets
    
    
    204,607
    
    
    
    
    
    
    
    
    
    
    
    161,942Allowance for loan losses
    
    
    (32,652
    )
    
    
    
    
    
    
    
    
    
    
    (26,493
    )Total noninterest-earning assets
    
    
    306,589
    
    
    
    
    
    
    
    
    
    
    
    272,697Total assets
    
    $
    3,603,642
    
    
    
    
    
    
    
    
    
    
    $
    3,140,028Interest bearing liabilities:Deposits:Demand and savings
    
    $
    948,507
    
    
    $
    2,145
    
    
    
    0.90
    %
    
    $
    959,840
    
    
    $
    1,239
    
    
    
    0.51
    %Certificates and other time
    
    
    723,113
    
    
    
    5,572
    
    
    
    3.06
    %
    
    
    614,241
    
    
    
    3,006
    
    
    
    1.95
    %Short-term borrowings
    
    
    514,155
    
    
    
    4,498
    
    
    
    3.47
    %
    
    
    270,682
    
    
    
    1,047
    
    
    
    1.54
    %Subordinated debt
    
    
    47,417
    
    
    
    950
    
    
    
    7.95
    %
    
    
    45,905
    
    
    
    704
    
    
    
    6.10
    %Junior subordinated debt
    
    
    82,475
    
    
    
    1,746
    
    
    
    8.40
    %
    
    
    82,475
    
    
    
    1,646
    
    
    
    7.94
    %Total interest-bearing liabilities
    
    
    2,315,667
    
    
    
    14,911
    
    
    
    2.55
    %
    
    
    1,973,143
    
    
    
    7,642
    
    
    
    1.54
    %Noninterest-bearing sources:Demand deposits
    
    
    928,828
    
    
    
    
    
    
    
    
    
    
    
    834,566Other liabilities
    
    
    28,012
    
    
    
    
    
    
    
    
    
    
    
    28,816Total noninterest-bearing liabilities
    
    
    956,840
    
    
    
    
    
    
    
    
    
    
    
    863,382Shareholders equity
    
    
    331,135
    
    
    
    
    
    
    
    
    
    
    
    303,503Total liabilities and shareholders equity
    
    $
    3,603,642
    
    
    
    
    
    
    
    
    
    
    $
    3,140,028Net interest income & margin
    
    
    
    
    
    $
    39,687
    
    
    
    4.78
    %
    
    
    
    
    
    $
    34,195
    
    
    
    4.74
    %
 
 (1)
    
    For the purpose of calculating loan yields, average loan balances include nonaccrual loans
with no related interest income. 22




---



##### Table of Contents



Nine Months Ended September 30,(Dollars in thousands)2005
    
    
    2004Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Yield/Rate
    
    
    Balance
    
    
    Interest
    
    
    Yield/RateInterest-Earning Assets:Loans held for sale (1)
    
    $
    10,138
    
    
    $
    559
    
    
    
    7.37
    %
    
    $
    11,721
    
    
    $
    619
    
    
    
    7.06
    %Loans held for investment (1):Taxable
    
    
    2,479,256
    
    
    
    130,063
    
    
    
    7.01
    %
    
    
    2,148,655
    
    
    
    100,078
    
    
    
    6.22
    %Non-taxable
    
    
    2,579
    
    
    
    141
    
    
    
    7.29
    %
    
    
    4,068
    
    
    
    195
    
    
    
    6.40
    %Securities:Taxable
    
    
    607,830
    
    
    
    18,904
    
    
    
    4.16
    %
    
    
    525,889
    
    
    
    15,557
    
    
    
    3.95
    %Non-taxable
    
    
    63,317
    
    
    
    1,844
    
    
    
    3.89
    %
    
    
    44,491
    
    
    
    1,439
    
    
    
    4.32
    %Trading assets
    
    
    26,905
    
    
    
    893
    
    
    
    4.44
    %
    
    
    130,089
    
    
    
    3,537
    
    
    
    3.63
    %Federal funds sold
    
    
    10,048
    
    
    
    218
    
    
    
    2.90
    %
    
    
    9,193
    
    
    
    68
    
    
    
    0.98
    %Deposits in financial institutions
    
    
    1,568
    
    
    
    39
    
    
    
    3.35
    %
    
    
    1,608
    
    
    
    44
    
    
    
    3.68
    %Total interest-earning assets
    
    
    3,201,641
    
    
    
    152,661
    
    
    
    6.38
    %
    
    
    2,875,714
    
    
    
    121,537
    
    
    
    5.65
    %Noninterest-earning assets:Cash and due from banks
    
    
    96,065
    
    
    
    
    
    
    
    
    
    
    
    99,153Premises and equipment, net
    
    
    39,079
    
    
    
    
    
    
    
    
    
    
    
    46,617Other assets
    
    
    200,293
    
    
    
    
    
    
    
    
    
    
    
    158,753Allowance for loan losses
    
    
    (31,425
    )
    
    
    
    
    
    
    
    
    
    
    (27,889
    )Total noninterest-earning assets
    
    
    304,012
    
    
    
    
    
    
    
    
    
    
    
    276,634Total
assets
    
    $
    3,505,653
    
    
    
    
    
    
    
    
    
    
    $
    3,152,348Interest bearing liabilities:Deposits:Demand and savings
    
    $
    972,343
    
    
    $
    5,772
    
    
    
    0.79
    %
    
    $
    945,246
    
    
    $
    3,272
    
    
    
    0.46
    %Certificates and other time
    
    
    665,778
    
    
    
    13,613
    
    
    
    2.73
    %
    
    
    682,133
    
    
    
    9,646
    
    
    
    1.89
    %Short-term borrowings
    
    
    482,003
    
    
    
    10,857
    
    
    
    3.01
    %
    
    
    243,632
    
    
    
    2,314
    
    
    
    1.27
    %Subordinated debt
    
    
    47,154
    
    
    
    2,645
    
    
    
    7.50
    %
    
    
    46,437
    
    
    
    1,971
    
    
    
    5.67
    %Junior subordinated debt
    
    
    82,475
    
    
    
    5,158
    
    
    
    8.36
    %
    
    
    82,475
    
    
    
    4,884
    
    
    
    7.91
    %Total interest-bearing liabilities
    
    
    2,249,753
    
    
    
    38,045
    
    
    
    2.26
    %
    
    
    1,999,923
    
    
    
    22,087
    
    
    
    1.48
    %Noninterest-bearing sources:Demand deposits
    
    
    903,327
    
    
    
    
    
    
    
    
    
    
    
    820,686Other liabilities
    
    
    28,108
    
    
    
    
    
    
    
    
    
    
    
    31,143Total noninterest-bearing liabilities
    
    
    931,435
    
    
    
    
    
    
    
    
    
    
    
    851,829Shareholders equity
    
    
    324,465
    
    
    
    
    
    
    
    
    
    
    
    300,596Total liabilities and shareholders
equity
    
    $
    3,505,653
    
    
    
    
    
    
    
    
    
    
    $
    3,152,348Net interest income & margin
    
    
    
    
    
    $
    114,616
    
    
    
    4.79
    %
    
    
    
    
    
    $
    99,450
    
    
    
    4.62
    %
 
 (1)
    
    For the purpose of calculating loan yields, average loan balances include nonaccrual loans
with no related interest income. 23




---



##### Table of Contents



Noninterest Income 
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2004
    
    
    September 30, 2005
    
    
    September 30, 2004Customer service fees
    
    $
    2,840
    
    
    $
    3,687
    
    
    $
    8,720
    
    
    $
    11,503Net gain (loss) on trading assets
    
    
    34
    
    
    
    (216
    )
    
    
    132
    
    
    
    269Net gain on the sale of securities
    
    
    6
    
    
    
    310
    
    
    
    60
    
    
    
    4,581Net gain on the sale of loans
    
    
    626
    
    
    
    418
    
    
    
    1,300
    
    
    
    638Bank owned life insurance
    
    
    734
    
    
    
    489
    
    
    
    2,167
    
    
    
    1,434Debit card income
    
    
    442
    
    
    
    407
    
    
    
    1,292
    
    
    
    1,172Other
    
    
    2,271
    
    
    
    1,676
    
    
    
    6,444
    
    
    
    5,151$
    6,953
    
    
    $
    6,771
    
    
    $
    20,115
    
    
    $
    24,748
      Noninterest Expense 
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2004
    
    
    September 30, 2005
    
    
    September 30, 2004Salaries and employee benefits
    
    $
    16,356
    
    
    $
    17,510
    
    
    $
    50,475
    
    
    $
    52,372Occupancy expense
    
    
    3,841
    
    
    
    3,945
    
    
    
    11,392
    
    
    
    11,285Technology
    
    
    1,409
    
    
    
    1,643
    
    
    
    4,004
    
    
    
    4,568Professional fees
    
    
    1,870
    
    
    
    1,333
    
    
    
    4,796
    
    
    
    3,790Postage, delivery and supplies
    
    
    809
    
    
    
    746
    
    
    
    2,337
    
    
    
    2,437Marketing
    
    
    542
    
    
    
    250
    
    
    
    1,804
    
    
    
    1,175Acquisition costs
    
    
    831
    
    
    
    
    
    
    
    831
    
    
    
    Core deposit intangibles amortization
    
    
    102
    
    
    
    125
    
    
    
    316
    
    
    
    372Net losses and carrying costs of
other real estate and foreclosed property
    
    
    40
    
    
    
    51
    
    
    
    138
    
    
    
    264Other
    
    
    3,474
    
    
    
    3,812
    
    
    
    11,018
    
    
    
    12,170$
    29,274
    
    
    $
    29,415
    
    
    $
    87,111
    
    
    $
    88,433
  24




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##### Table of Contents



Income Taxes 
 FINANCIAL CONDITION
 Loans Held for Investment 
 September 30, 2005
    
    
    December 31, 2004Amount
    
    
    %
    
    
    Amount
    
    
    %Commercial and industrial
    
    $
    751,372
    
    
    
    27.9
    %
    
    $
    682,209
    
    
    
    29.2
    %Real estate:Commercial
    
    
    1,188,393
    
    
    
    44.2
    %
    
    
    1,043,960
    
    
    
    44.6
    %Construction
    
    
    447,260
    
    
    
    16.6
    %
    
    
    329,982
    
    
    
    14.1
    %Residential mortgage
    
    
    195,862
    
    
    
    7.3
    %
    
    
    183,839
    
    
    
    7.9
    %Consumer/other
    
    
    78,272
    
    
    
    2.9
    %
    
    
    72,997
    
    
    
    3.1
    %Foreign loans
    
    
    28,586
    
    
    
    1.1
    %
    
    
    25,109
    
    
    
    1.1
    %Total loans held for investment
    
    $
    2,689,745
    
    
    
    100.0
    %
    
    $
    2,338,096
    
    
    
    100.0
    %
    Loans Held for Sale 
 25




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##### Table of Contents



Trading Assets 
 Securities 
 Deposits 
 September 30, 2005
    
    
    December 31, 2004Amount
    
    
    %
    
    
    Amount
    
    
    %Noninterest-bearing demand
    
    $
    1,031,366
    
    
    
    37.2
    %
    
    $
    884,017
    
    
    
    36.2
    %Interest-bearing demand
    
    
    974,629
    
    
    
    35.2
    %
    
    
    970,281
    
    
    
    39.7
    %Certificates and other time depositsJumbo
    
    
    476,307
    
    
    
    17.2
    %
    
    
    345,785
    
    
    
    14.1
    %Regular
    
    
    223,765
    
    
    
    8.1
    %
    
    
    197,561
    
    
    
    8.1
    %Brokered
    
    
    62,942
    
    
    
    2.3
    %
    
    
    46,323
    
    
    
    1.9
    %Total deposits
    
    $
    2,769,009
    
    
    
    100.0
    %
    
    $
    2,443,967
    
    
    
    100.0
    %
  Short-term borrowings 
 ASSET QUALITY
 Risk Elements 
 26




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##### Table of Contents



September 30,
    
    
    December 31,2005
    
    
    2004Nonperforming loans:Nonaccrual
    
    $
    24,113
    
    
    $
    20,605Restructured
    
    
    49
    
    
    
    Real estate acquired by foreclosure
    
    
    635
    
    
    
    1,536Other repossessed assets
    
    
    331
    
    
    
    216Total nonperforming assets
    
    $
    25,128
    
    
    $
    22,357Potential problem loans
    
    $
    62,356
    
    
    $
    54,293Accruing loans past due 90 days or more
    
    $
    403
    
    
    $
    2,395Period-end allowance for loan losses to
nonperforming loans
    
    
    129.24
    %
    
    
    142.71
    %Nonperforming loans to period-end loans
    
    
    0.89
    %
    
    
    0.88
    %Nonperforming assets to period-end assets
    
    
    0.67
    %
    
    
    0.67
    %Nonperforming assets to period-end loans and
foreclosed assets
    
    
    0.93
    %
    
    
    0.95
    %
  Allowance for Credit Losses 
    27




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Allowance for loan losses at beginning of period
    
    $
    32,209
    
    
    $
    26,129
    
    
    $
    29,407
    
    
    $
    30,722Charge-offs:Commercial, financial, and industrial
    
    
    6,192
    
    
    
    1,570
    
    
    
    9,412
    
    
    
    9,050Real estate, mortgage and construction
    
    
    163
    
    
    
    201
    
    
    
    1,739
    
    
    
    3,215Consumer
    
    
    333
    
    
    
    355
    
    
    
    1,171
    
    
    
    1,072Total charge-offs
    
    
    6,688
    
    
    
    2,126
    
    
    
    12,322
    
    
    
    13,337RecoveriesCommercial, financial, and industrial
    
    
    420
    
    
    
    568
    
    
    
    1,454
    
    
    
    1,886Real estate, mortgage and construction
    
    
    97
    
    
    
    6
    
    
    
    707
    
    
    
    106Consumer
    
    
    78
    
    
    
    67
    
    
    
    230
    
    
    
    186Total recoveries
    
    
    595
    
    
    
    641
    
    
    
    2,391
    
    
    
    2,178Net charge-offs
    
    
    6,093
    
    
    
    1,485
    
    
    
    9,931
    
    
    
    11,159Allowance for credit losses associated with acquired institution
    
    
    761
    
    
    
    
    
    
    
    761Provision for loan losses
    
    
    4,350
    
    
    
    2,179
    
    
    
    10,991
    
    
    
    7,260Allowance for loan losses at end of period
    
    $
    31,227
    
    
    $
    26,823
    
    
    $
    31,227
    
    
    $
    26,823Reserve for losses on unfunded lending commitments at
beginning of period
    
    
    746
    
    
    
    1,200
    
    
    
    826
    
    
    
    Provision for losses on unfunded lending commitments
    
    
    215
    
    
    
    (64
    )
    
    
    135
    
    
    
    1,136Reserve for losses on unfunded lending commitments at
end of period
    
    
    961
    
    
    
    1,136
    
    
    
    961
    
    
    
    1,136Total allowance for credit losses
    
    $
    32,188
    
    
    $
    27,959
    
    
    $
    32,188
    
    
    $
    27,959Period-end allowance for credit losses to
period-end loans
    
    
    1.19
    %
    
    
    1.26
    %
    
    
    1.19
    %
    
    
    1.26
    %Period-end allowance for loan losses to
period-end loans
    
    
    1.16
    %
    
    
    1.20
    %
    
    
    1.16
    %
    
    
    1.20
    %Period-end allowance for loan losses to
nonperforming loans
    
    
    129.24
    %
    
    
    223.00
    %
    
    
    129.24
    %
    
    
    223.00
    %Nonperforming assets to period-end loans and foreclosed assets
    
    
    0.93
    %
    
    
    0.73
    %
    
    
    0.93
    %
    
    
    0.73
    %Nonperforming loans to period-end loans
    
    
    0.89
    %
    
    
    0.54
    %
    
    
    0.89
    %
    
    
    0.54
    %Nonperforming assets to period-end assets
    
    
    0.67
    %
    
    
    0.50
    %
    
    
    0.67
    %
    
    
    0.50
    %Net charge-offs to average loans (annualized)
    
    
    0.93
    %
    
    
    0.27
    %
    
    
    0.53
    %
    
    
    0.69
    %
 INTEREST RATE SENSITIVITY
     28




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##### Table of Contents



IncreaseChanges in
    
    (Decrease) inInterest Rates
    
    Net Interest(Basis Points)
    
    IncomeSeptember 30, 2005+200
    
    
    8.48
    %+100
    
    
    4.41
    %Base
    
    
    0.00
    %-100
    
    
    -4.94
    %-200
    
    
    -12.64
    %December 31, 2004+200
    
    
    5.96
    %+100
    
    
    3.14
    %Base
    
    
    0.00
    %-100
    
    
    -5.43
    %-200
    
    
    -6.69
    %
  CAPITAL RESOURCES AND LIQUIDITY
 Capital Resources 
 For Minimum CapitalActual
    
    
    
    
    
    Adequacy PurposesAmount
    
    Ratio
    

    
    
    
    
    Amount
    
    RatioTotal capital (to risk weighted assets)
    
    $
    404,294
    
    
    12.3%
    


    
    
    
    
    $
    262,104

    
    
    8.0%Tier 1 capital (to risk weighted assets)
    
    
    325,472
    
    
    9.9%
    
    

    
    
    
    
    131,052
    
    
    4.0%Tier 1 capital (to average assets)
    
    
    325,472
    
    
    9.2%
    
    

    
    
    
    
    141,345
    
    
    4.0%
 Liquidity 
   29




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
  
 ITEM 4. CONTROLS AND PROCEDURES.
 Evaluation of Disclosure Controls and Procedures 
 Changes in Internal Control Over Financial Reporting 
 
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  
 ITEM 5. OTHER INFORMATION.
  
 ITEM 6. EXHIBITS.
  *10.1
    
    Agreement and Plan of Merger dated July 7, 2005, by and among Sterling
Bancshares, Inc., SBPB, Inc. and Prestonwood Bancshares, Inc.*10.2
    
    Non-Compete Agreement between Sterling Bancshares, Inc. and Max W. Wells dated
July 7, 2005.10.3
    
    Second Amendment to Credit Agreement between Sterling Bancshares, Inc. and
Wells Fargo Bank, National Association, dated September 29, 2005 (incorporated
by reference to Exhibit 10.1 of the Companys Current
Report on Form 8-K filed on October 5, 2005).11
    
    Statement Regarding Computation of Earnings Per Share
(included as Note (6) to Consolidated Financial Statements on page 12 of this
Quarterly Report on Form 10-Q).
 30




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##### Table of Contents



*31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of J.
Downey Bridgwater, President and Chief Executive Officer.*31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of
Stephen C. Raffaele, Executive Vice President and Chief Financial Officer.**32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.**32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
 
 *
    
    As filed herewith.**
    
    As furnished herewith. 31




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##### Table of Contents



SIGNATURES
  STERLING BANCSHARES, INC.Date: November 8, 2005
    
    By:
    
    /s/ J. Downey BridgwaterJ. Downey Bridgwater
President and Chief Executive Officer
(Principal executive officer)Date: November 8, 2005
    
    By:
    
    /s/ Stephen C. RaffaeleStephen C. Raffaele
Executive Vice President
and Chief Financial Officer
(Principal financial and accounting officer)
 32




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    Description*10.1
    
    Agreement and Plan of Merger dated July 7, 2005, by and among Sterling Bancshares, Inc., SBPB, Inc. and
Prestonwood Bancshares, Inc.*10.2
    
    Non-Compete Agreement between Sterling Bancshares, Inc. and Max W. Wells dated July 7, 2005.10.3
    
    Second Amendment to Credit Agreement between Sterling Bancshares, Inc. and Wells Fargo Bank,
National Association, dated September 29, 2005 (incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on October 5, 2005).11
    
    Statement Regarding Computation of Earnings Per Share (included as Note (6) to
Consolidated Financial Statements on page 12 of this Quarterly Report on Form 10-Q).*31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of J. Downey Bridgwater, President and Chief Executive
Officer.*31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 of Stephen C. Raffaele, Executive Vice President and Chief
Financial Officer.**32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.**32.2
    
    Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
 
 *
    
    As filed herewith.**
    
    As furnished herewith.