##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549



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FORM 10 - Q



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|x | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended June 30, 2004



| ̈ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File Number: 0-20750



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STERLING BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Texas                                                          |  | 74-2175590                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification 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 July 30, 2004, there were outstanding 44,863,478 shares of common stock, par value $1.00 per share, of the registrant.



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##### Table of Contents

STERLING BANCSHARES, INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2004

TABLE OF CONTENTS



|           |  |                                                                                       |  |   
|---------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I.    |  | FINANCIAL INFORMATION                                                                 |  |   
|           |  |                                                                                      
|Item 1.    |  | Financial Statements                                                                  |  |   
|           |  |                                                                                      
|           |  | Consolidated Balance Sheets                                                           |  | 2 
|           |  |                                                                                      
|           |  | Consolidated Statements of Income                                                     |  | 3 
|           |  |                                                                                      
|           |  | Consolidated Statements of Shareholders Equity                                       |  | 4 
|           |  |                                                                                      
|           |  | Consolidated Statements of Cash Flows                                                 |  | 5 
|           |  |                                                                                      
|           |  | Notes to Consolidated Financial Statements                                            |  | 6 
|           |  |                                                                                      
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 16
|           |  |                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 29
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 29
|           |  |                                                                                      
|PART II.   |  | OTHER INFORMATION                                                                     |  |   
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 29
|           |  |                                                                                      
|Item 2.    |  | Changes in Securities and Use of Proceeds                                             |  | 29
|           |  |                                                                                      
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 29
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 30
|           |  |                                                                                      
|Item 5.    |  | Other Information                                                                     |  | 30
|           |  |                                                                                      
|Item 6.    |  | Exhibits and Reports on Form 8-K                                                      |  | 30
|           | 
|SIGNATURES |  | 32                                                                                   



1



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##### Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except
share amounts)



|                                                                                                                                                                 |  |              |           |   |                  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                 |  | June 30,2004 |           |   | December 31,2003 |  
|ASSETS                                                                                                                                                           |  |              |           |   |                  |   |           |  
|Cash and cash equivalents                                                                                                                                        |  | $            | 131,489   |   |                  | $ | 136,764   |  
|Interest-bearing deposits in financial institutions                                                                                                              |  |              | 1,600     |   |                  |   | 1,358     |  
|Trading assets                                                                                                                                                   |  |              | 92,751    |   |                  |   | 172,825   |  
|Available-for-sale securities, at fair value                                                                                                                     |  |              | 473,787   |   |                  |   | 522,936   |  
|Held-to-maturity securities, at amortized cost                                                                                                                   |  |              | 45,385    |   |                  |   | 42,157    |  
|                                                                                                                                                                 |  |             
|Loans held for sale                                                                                                                                              |  |              | 13,895    |   |                  |   | 26,308    |  
|Loans held for investment                                                                                                                                        |  |              | 2,153,589 |   |                  |   | 2,130,731 |  
|                                                                                                                                                                 |  |              |           |   |                  |   |           |  
|Total loans                                                                                                                                                      |  |              | 2,167,484 |   |                  |   | 2,157,039 |  
|Allowance for credit losses                                                                                                                                      |  |              | (27,329   | ) |                  |   | (30,722   | )
|                                                                                                                                                                 |  |              |           |   |                  |   |           |  
|Loans, net                                                                                                                                                       |  |              | 2,140,155 |   |                  |   | 2,126,317 |  
|                                                                                                                                                                 |  |             
|Premises and equipment, net                                                                                                                                      |  |              | 43,679    |   |                  |   | 48,541    |  
|Real estate acquired by foreclosure                                                                                                                              |  |              | 2,608     |   |                  |   | 2,124     |  
|Goodwill                                                                                                                                                         |  |              | 62,480    |   |                  |   | 62,933    |  
|Core deposit intangibles, net                                                                                                                                    |  |              | 2,078     |   |                  |   | 2,326     |  
|Accrued interest receivable                                                                                                                                      |  |              | 10,787    |   |                  |   | 12,046    |  
|Other assets                                                                                                                                                     |  |              | 83,409    |   |                  |   | 76,553    |  
|                                                                                                                                                                 |  |              |           |   |                  |   |           |  
|TOTAL ASSETS                                                                                                                                                     |  | $            | 3,090,208 |   |                  | $ | 3,206,880 |  
|                                                                                                                                                                 |  |              |           |   |                  |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                             |  |              |           |   |                  |   |           |  
|LIABILITIES:                                                                                                                                                     |  |              |           |   |                  |   |           |  
|Deposits:                                                                                                                                                        |  |              |           |   |                  |   |           |  
|Noninterest-bearing demand                                                                                                                                       |  | $            | 845,874   |   |                  | $ | 834,313   |  
|Interest-bearing demand                                                                                                                                          |  |              | 977,943   |   |                  |   | 929,577   |  
|Certificates and other time deposits                                                                                                                             |  |              | 664,788   |   |                  |   | 654,479   |  
|                                                                                                                                                                 |  |              |           |   |                  |   |           |  
|Total deposits                                                                                                                                                   |  |              | 2,488,605 |   |                  |   | 2,418,369 |  
|Other borrowed funds                                                                                                                                             |  |              | 149,750   |   |                  |   | 324,160   |  
|Subordinated debt                                                                                                                                                |  |              | 45,254    |   |                  |   | 46,533    |  
|Junior subordinated debt                                                                                                                                         |  |              | 82,475    |   |                  |   | 82,475    |  
|Accrued interest payable and other liabilities                                                                                                                   |  |              | 26,860    |   |                  |   | 42,747    |  
|                                                                                                                                                                 |  |              |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                |  |              | 2,792,944 |   |                  |   | 2,914,284 |  
|                                                                                                                                                                 |  |             
|COMMITMENTS AND CONTINGENCIES                                                                                                                                    |  |              |          |   |                  |   |          |  
|                                                                                                                                                                 |  |             
|SHAREHOLDERS EQUITY:                                                                                                                                            |  |              |           |   |                  |   |           |  
|Convertible preferred stock, $1 par value, 1,000,000 shares authorized, 20,000 issued and outstanding                                                            |  |              | 20        |   |                  |   | 20        |  
|Common stock, $1 par value, 100,000,000 shares authorized, 44,853,183 and 44,642,109 issued and outstanding at June 30, 2004 and December 31,
2003, respectively |  |              | 44,853    |   |                  |   | 44,642    |  
|Capital surplus                                                                                                                                                  |  |              | 50,853    |   |                  |   | 48,953    |  
|Retained earnings                                                                                                                                                |  |              | 205,651   |   |                  |   | 197,819   |  
|Accumulated other comprehensive income (loss), net of tax                                                                                                        |  |              | (4,113    | ) |                  |   | 1,162     |  
|                                                                                                                                                                 |  |              |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                                       |  |              | 297,264   |   |                  |   | 292,596   |  
|                                                                                                                                                                 |  |              |           |   |                  |   |           |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                       |  | $            | 3,090,208 |   |                  | $ | 3,206,880 |  
|                                                                                                                                                                 |  |              |           |   |                  |   |           |  



See Notes to Consolidated Financial
Statements.



2



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##### Table of Contents

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except
per share amounts)



|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|-------------------------------------------------------------- |  | --------------------------- | ------ | ---- | ------------------------- | ------ | ---- |  | ---- | ------ |  | - | ------
|                                                               |  | Three Months Ended June 30, |        |      | Six Months Ended June 30,
|                                                               |  | 2004                        |        | 2003 |                           |        | 2004 |  | 2003
|Interest income:                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Loans, including fees                                          |  | $                           | 33,023 |      | $                         | 41,172 |      |  | $    | 66,257 |  | $ | 81,196
|Securities:                                                    |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Taxable                                                        |  |                             | 4,977  |      |                           | 2,201  |      |  |      | 9,997  |  |   | 4,925 
|Non-taxable                                                    |  |                             | 464    |      |                           | 595    |      |  |      | 919    |  |   | 1,244 
|Trading assets                                                 |  |                             | 991    |      |                           | 871    |      |  |      | 2,453  |  |   | 1,733 
|Federal funds sold                                             |  |                             | 23     |      |                           | 39     |      |  |      | 43     |  |   | 86    
|Deposits in financial institutions                             |  |                             | 16     |      |                           | 17     |      |  |      | 31     |  |   | 36    
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Total interest income                                          |  |                             | 39,494 |      |                           | 44,895 |      |  |      | 79,700 |  |   | 89,220
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Interest expense:                                              |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Demand and savings deposits                                    |  |                             | 1,080  |      |                           | 1,288  |      |  |      | 2,033  |  |   | 2,749 
|Certificates and other time deposits                           |  |                             | 3,275  |      |                           | 3,827  |      |  |      | 6,640  |  |   | 8,053 
|Other borrowed funds                                           |  |                             | 586    |      |                           | 1,578  |      |  |      | 1,267  |  |   | 2,926 
|Notes payable                                                  |  |                             |       |      |                           | 155    |      |  |      |       |  |   | 320   
|Subordinated debt                                              |  |                             | 620    |      |                           | 716    |      |  |      | 1,215  |  |   | 716   
|Junior subordinated debt                                       |  |                             | 1,587  |      |                           | 1,597  |      |  |      | 3,178  |  |   | 3,197 
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Total interest expense                                         |  |                             | 7,148  |      |                           | 9,161  |      |  |      | 14,333 |  |   | 17,961
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Net interest income                                            |  |                             | 32,346 |      |                           | 35,734 |      |  |      | 65,367 |  |   | 71,259
|Provision for credit losses                                    |  |                             | 2,781  |      |                           | 6,098  |      |  |      | 6,281  |  |   | 10,548
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Net interest income after provision for credit losses          |  |                             | 29,565 |      |                           | 29,636 |      |  |      | 59,086 |  |   | 60,711
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Noninterest income:                                            |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Customer service fees                                          |  |                             | 3,688  |      |                           | 3,986  |      |  |      | 7,609  |  |   | 8,300 
|Net gain (loss) on the sale of banking offices                 |  |                             |       |      |                           | (142   | )    |  |      |       |  |   | 3,240 
|Net gain on the sale of securities                             |  |                             | 4,128  |      |                           |       |      |  |      | 4,271  |  |   | 374   
|Net gain on the sale of trading assets                         |  |                             | 154    |      |                           | 280    |      |  |      | 502    |  |   | 627   
|Other                                                          |  |                             | 2,807  |      |                           | 2,963  |      |  |      | 5,612  |  |   | 5,822 
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Total noninterest income                                       |  |                             | 10,777 |      |                           | 7,087  |      |  |      | 17,994 |  |   | 18,363
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Noninterest expense:                                           |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Salaries and employee benefits                                 |  |                             | 17,175 |      |                           | 16,082 |      |  |      | 34,862 |  |   | 33,333
|Occupancy expense                                              |  |                             | 3,743  |      |                           | 3,960  |      |  |      | 7,340  |  |   | 7,712 
|Technology                                                     |  |                             | 1,537  |      |                           | 1,229  |      |  |      | 2,925  |  |   | 2,429 
|Professional fees                                              |  |                             | 1,395  |      |                           | 1,289  |      |  |      | 2,457  |  |   | 1,983 
|Postage, delivery and supplies                                 |  |                             | 816    |      |                           | 854    |      |  |      | 1,691  |  |   | 1,805 
|Marketing                                                      |  |                             | 539    |      |                           | 480    |      |  |      | 925    |  |   | 885   
|Core deposit intangible amortization                           |  |                             | 124    |      |                           | 114    |      |  |      | 248    |  |   | 228   
|Other                                                          |  |                             | 4,756  |      |                           | 3,496  |      |  |      | 8,699  |  |   | 7,220 
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Total noninterest expense                                      |  |                             | 30,085 |      |                           | 27,504 |      |  |      | 59,147 |  |   | 55,595
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Income from continuing operations before income taxes          |  |                             | 10,257 |      |                           | 9,219  |      |  |      | 17,933 |  |   | 23,479
|Provision for income taxes                                     |  |                             | 3,184  |      |                           | 3,028  |      |  |      | 5,626  |  |   | 7,747 
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Income from continuing operations                              |  |                             | 7,073  |      |                           | 6,191  |      |  |      | 12,307 |  |   | 15,732
|Income (loss) from discontinued operations before income taxes |  |                             |       |      |                           | (2,534 | )    |  |      |       |  |   | 293   
|Provision (benefit) for income taxes                           |  |                             |       |      |                           | (984   | )    |  |      |       |  |   | 147   
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Income (loss) from discontinued operations                     |  |                             |       |      |                           | (1,550 | )    |  |      |       |  |   | 146   
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Net income                                                     |  | $                           | 7,073  |      | $                         | 4,641  |      |  | $    | 12,307 |  | $ | 15,878
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Earnings per share from continuing operations:                 |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Basic                                                          |  | $                           | 0.16   |      | $                         | 0.14   |      |  | $    | 0.28   |  | $ | 0.36  
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Diluted                                                        |  | $                           | 0.16   |      | $                         | 0.14   |      |  | $    | 0.27   |  | $ | 0.35  
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Earnings per share from discontinued operations:               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Basic                                                          |  | $                           |       |      | $                         | (0.04  | )    |  | $    |       |  | $ |      
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Diluted                                                        |  | $                           |       |      | $                         | (0.03  | )    |  | $    |       |  | $ |      
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Earnings per share:                                            |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Basic                                                          |  | $                           | 0.16   |      | $                         | 0.11   |      |  | $    | 0.28   |  | $ | 0.36  
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Diluted                                                        |  | $                           | 0.16   |      | $                         | 0.10   |      |  | $    | 0.27   |  | $ | 0.36  
|                                                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       



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)



|                                                                                                   |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|-------------------------------------------------------------------------------------------------- |  | -------------------------- | - |  | ------------ | --- | -------------- | ------ | ------ | ---------------- | - | ------ | ------------------------------------ | - | ------ | ----- |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                   |  | ConvertiblePreferred Stock |   |  | Common Stock |     | CapitalSurplus |        |        | RetainedEarnings |   |        | Accumulated OtherComprehensiveIncome |   |        | Total | 
|                                                                                                   |  | Shares                     |   |  | Amount       |     |                | Shares |        | Amount           |   |        |                                      |  
|BALANCE AT JANUARY 1, 2003                                                                         |  | 59                         |   |  | $            | 59  |                |        | 43,983 |                  | $ | 43,983 |                                      | $ | 44,633 |       |  | $ | 156,664 |   |  | $ | 3,988  |   |  | $ | 249,327 |  
|Comprehensive income:                                                                              |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                                                         |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   | 15,878  |   |  |   |        |   |  |   | 15,878  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of $321   |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   | (597   | ) |  |   | (597    | )
|Less: Reclassification adjustment for gains included in net income, net of taxes of $131           |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   | (243   | ) |  |   | (243    | )
|                                                                                                   |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                         |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   |        |   |  |   | 15,038  |  
|                                                                                                   |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                           |  |                            |   |  |              |     |                |        | 112    |                  |   | 112    |                                      |   | 1,004  |       |  |   |         |   |  |   |        |   |  |   | 1,116   |  
|Conversion of preferred stock                                                                      |  | (39                        | ) |  |              | (39 | )              |        | 64     |                  |   | 64     |                                      |   | (25    | )     |  |   |         |   |  |   |        |   |  |   |        |  
|Cash dividends paid                                                                                |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   | (3,967  | ) |  |   |        |   |  |   | (3,967  | )
|                                                                                                   |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT JUNE 30, 2003                                                                           |  | 20                         |   |  | $            | 20  |                |        | 44,159 |                  | $ | 44,159 |                                      | $ | 45,612 |       |  | $ | 168,575 |   |  | $ | 3,148  |   |  | $ | 261,514 |  
|                                                                                                   |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT JANUARY 1, 2004                                                                         |  | 20                         |   |  |              | 20  |                |        | 44,642 |                  |   | 44,642 |                                      |   | 48,953 |       |  |   | 197,819 |   |  |   | 1,162  |   |  |   | 292,596 |  
|Comprehensive income:                                                                              |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                                                         |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   | 12,307  |   |  |   |        |   |  |   | 12,307  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of $3,089 |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   | (5,736 | ) |  |   | (5,736  | )
|Less: Reclassification adjustment for losses included in net income, net of taxes of $248          |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   | 461    |   |  |   | 461     |  
|                                                                                                   |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                         |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   |        |   |  |   | 7,032   |  
|                                                                                                   |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                           |  |                            |   |  |              |     |                |        | 211    |                  |   | 211    |                                      |   | 1,900  |       |  |   |         |   |  |   |        |   |  |   | 2,111   |  
|Cash dividends paid                                                                                |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   | (4,475  | ) |  |   |        |   |  |   | (4,475  | )
|                                                                                                   |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT JUNE 30, 2004                                                                           |  | 20                         |   |  | $            | 20  |                |        | 44,853 |                  | $ | 44,853 |                                      | $ | 50,853 |       |  | $ | 205,651 |   |  | $ | (4,113 | ) |  | $ | 297,264 |  
|                                                                                                   |  |                            |   |  |              |     |                |        |        |                  |   |        |                                      |   |        |       |  |   |         |   |  |   |        |   |  |   |         |  



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)



|                                                                                                          |  |                           |          |   |      |   |          |  
|--------------------------------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                                          |  | Six Months Ended June 30, |         
|                                                                                                          |  | 2004                      |          |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                     |  |                           |          |   |      |   |          |  
|Income from continuing operations                                                                         |  | $                         | 12,307   |   |      | $ | 15,732   |  
|Adjustments to reconcile income from continuing operations to net cash provided by operating activities:  |  |                           |          |   |      |   |          |  
|Amortization and accretion of premiums and discounts on securities, net                                   |  |                           | 4,429    |   |      |   | 3,174    |  
|Net gain on the sale of securities                                                                        |  |                           | (4,271   | ) |      |   | (374     | )
|Net gain on the sale of premises and equipment                                                            |  |                           | (43      | ) |      |   |         |  
|Net gain on the sale of trading assets                                                                    |  |                           | (502     | ) |      |   | (627     | )
|Net gain on the sale of banking offices                                                                   |  |                           |         |   |      |   | (3,240   | )
|Provision for credit losses                                                                               |  |                           | 6,281    |   |      |   | 10,548   |  
|Writedowns, less gains on sale, of real estate acquired by foreclosure                                    |  |                           | (37      | ) |      |   | (239     | )
|Writedowns of premises and equipment                                                                      |  |                           | 1,109    |   |      |   |         |  
|Depreciation and amortization                                                                             |  |                           | 4,472    |   |      |   | 4,485    |  
|Proceeds from sales of trading assets                                                                     |  |                           | 247,190  |   |      |   | 259,867  |  
|Purchases of trading assets                                                                               |  |                           | (186,880 | ) |      |   | (255,965 | )
|Proceeds from principal paydowns of trading securities                                                    |  |                           | 2,114    |   |      |   | 2,091    |  
|Net (increase) decrease in loans held for sale                                                            |  |                           | (5,574   | ) |      |   | 96,964   |  
|Net decrease in accrued interest receivable and other assets                                              |  |                           | 678      |   |      |   | 82,131   |  
|Net decrease in accrued interest payable and other liabilities                                            |  |                           | (17,169  | ) |      |   | (11,835  | )
|                                                                                                          |  |                           |          |   |      |   |          |  
|Net cash provided by operating activities from continuing operations                                      |  |                           | 64,104   |   |      |   | 202,712  |  
|                                                                                                          |  |                          
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                     |  |                           |          |   |      |   |          |  
|Proceeds from maturities and paydowns of held-to-maturity securities                                      |  |                           | 4,042    |   |      |   | 8,333    |  
|Proceeds from the sale of available-for-sale securities                                                   |  |                           | 145,737  |   |      |   | 16,870   |  
|Proceeds from maturities and paydowns of available-for-sale securities                                    |  |                           | 79,168   |   |      |   | 100,143  |  
|Purchases of available-for-sale securities                                                                |  |                           | (165,758 | ) |      |   | (95,990  | )
|Purchases of held-to-maturity securities                                                                  |  |                           | (7,331   | ) |      |   |         |  
|Net increase in loans held for investment                                                                 |  |                           | (16,402  | ) |      |   | (140,900 | )
|Proceeds from sale of real estate acquired by foreclosure                                                 |  |                           | 1,410    |   |      |   | 3,281    |  
|Net (increase) decrease in interest-bearing deposits in financial institutions                            |  |                           | (242     | ) |      |   | 63       |  
|Cash and cash equivalents related to sales of banking offices                                             |  |                           |         |   |      |   | (95,909  | )
|Proceeds from sale of premises and equipment                                                              |  |                           | 146      |   |      |   | 781      |  
|Purchase of premises and equipment                                                                        |  |                           | (3,611   | ) |      |   | (1,770   | )
|                                                                                                          |  |                           |          |   |      |   |          |  
|Net cash provided by (used in) investing activities from continuing operations                            |  |                           | 37,159   |   |      |   | (205,098 | )
|                                                                                                          |  |                          
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                     |  |                           |          |   |      |   |          |  
|Net increase in deposit accounts                                                                          |  |                           | 70,236   |   |      |   | 58,580   |  
|Repayment of notes payable                                                                                |  |                           |         |   |      |   | (2,736   | )
|Issuance of subordinated debt                                                                             |  |                           |         |   |      |   | 49,940   |  
|Net decrease in other borrowed funds                                                                      |  |                           | (174,410 | ) |      |   | (106,790 | )
|Proceeds from issuance of common stock and preferred stock                                                |  |                           | 2,111    |   |      |   | 1,116    |  
|Dividends paid                                                                                            |  |                           | (4,475   | ) |      |   | (3,967   | )
|                                                                                                          |  |                           |          |   |      |   |          |  
|Net cash used in financing activities from continuing operations                                          |  |                           | (106,538 | ) |      |   | (3,857   | )
|                                                                                                          |  |                          
|Net cash provided by discontinued operations                                                              |  |                           |         |   |      |   | 15,917   |  
|                                                                                                          |  |                          
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                      |  |                           | (5,275   | ) |      |   | 9,674    |  
|CASH AND CASH EQUIVALENTS:                                                                                |  |                           |          |   |      |   |          |  
|Beginning of period                                                                                       |  |                           | 136,764  |   |      |   | 147,000  |  
|                                                                                                          |  |                           |          |   |      |   |          |  
|End of period                                                                                             |  | $                         | 131,489  |   |      | $ | 156,674  |  
|                                                                                                          |  |                           |          |   |      |   |          |  
|Supplemental information:                                                                                 |  |                           |          |   |      |   |          |  
|Income taxes paid                                                                                         |  | $                         | 23,655   |   |      | $ | 14,489   |  
|Interest paid                                                                                             |  |                           | 13,830   |   |      |   | 14,418   |  
|Noncash investing and financing activities- Acquisitions of real estate through foreclosure of collateral |  |                           | 1,857    |   |      |   | 4,420    |  



See Notes to Consolidated Financial
Statements.



5



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##### Table of Contents

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



1. ACCOUNTING POLICIES



Basis of Presentation



The
accompanying Consolidated Financial Statements are unaudited and include the accounts of Sterling Bancshares, Inc. and its subsidiaries (the Company) except for those where it has been determined that the Company is not the primary
beneficiary. The Companys accounting and financial reporting policies are in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to
Form 10-Q. The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature
unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. The interim financial information should be read in conjunction
with the Companys 2003 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to current period classifications. These reclassifications had no affect on net income or shareholders equity.



Recent Accounting Standards



On January 1, 2004, the Company adopted FIN 46R, Consolidation of Variable Interest
Entities. Upon adoption, the trusts that previously issued the outstanding company-obligated mandatorily redeemable trust preferred securities were deconsolidated from the Companys Consolidated Financial Statements. Instead, the junior
subordinated debentures issued by the Company to these subsidiary trusts are shown as liabilities in the consolidated balance sheets and interest expense associated with the junior subordinated debentures are shown in the consolidated statements of
income. The Consolidated Financial Statements have been restated to reflect the adoption of FIN 46R. Adoption of FIN 46R did not affect previously reported amounts for net income or shareholders equity.



In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement
of Position No. 03-3 (SOP 03-3), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for differences between the contractual cash flows and the cash flows expected to be
collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on the present value of the cash
flows expected to be collected with no carryover of any valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the
purchased loans experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows subsequently are expected to be
received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 will be effective for loans and debt securities acquired after December 31, 2004. The Company does not expect the requirements of SOP 03-3 to
have a material impact on its financial condition or results of operations.



SEC Staff Accounting Bulletin (SAB) No. 105, Application of Accounting Principles to Loan Commitments(SAB 105) addresses the application of generally accepted accounting principles to loan commitments accounted
for as derivative instruments. SAB 105 provides that the fair value of recorded loan commitments to be held for sale that are accounted for as derivatives should not incorporate the expected future cash flows related to the associated servicing of
the future loan. In addition, SAB 105 requires registrants to disclose their accounting policy for loan commitments. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31,
2004. SAB 105 did not have a material impact on the Companys Consolidated Financial Statements.



In March 2004, the Emerging Issues Task Force reached a consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This Issue provides guidance for
determining when an investment is other-than-temporarily impaired. This Issue specifically addresses whether an investor has the ability and intent to hold an investment until recovery. In addition, Issue 03-1 contains disclosure requirements that
provide useful information about impairments that have not been recognized as other-than-temporary for investments within the scope of this Issue. The guidance for evaluating whether an investment is other-than-temporarily impaired should be applied
in reporting periods beginning after June 15, 2004. Management has not determined the impact of the proposed guidance on the Companys Consolidated Financial Statements.



6



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##### Table of Contents

Stock-Based Compensation



The Company accounts for stock-based employee compensation plans using the intrinsic value-based method of accounting, as permitted, and
discloses pro forma information as if accounted for using the fair value-based method as prescribed by accounting principles. Because the exercise price of the Companys employee stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized on options granted. Compensation expense for restricted stock awards is based on the market price of the stock on the date of grant and is recognized ratably over the vesting period of the
award.



If compensation cost for the Companys stock-based compensation
plans had been determined based on the fair value method 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 accounting principles and has been determined as if the Company accounted for its employee stock option plans under the fair value method. The fair value of options was estimated using a Black-Scholes option pricing
model. Because employee stock options have differing characteristics and changes in the subjective input assumptions can materially affect the fair value estimate, the Black-Scholes valuation model does not necessarily provide a reliable measure of
the fair value of employee stock options. 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 share amounts):



|                                                                                                                     |  |                             |       |   |                           |   |       |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                     |  | Three months ended June 30, |       |   | Six months ended June 30, |  
|                                                                                                                     |  | 2004                        |       |   | 2003                      |   |       | 2004 |  |   | 2003   |  
|Net income, as reported                                                                                              |  | $                           | 7,073 |   |                           | $ | 4,641 |      |  | $ | 12,307 |   |  | $ | 15,878 |  
|Add: Stock-based employee compensation expense included in reported net income, net of related taxes                 |  |                             | 207   |   |                           |   | 7     |      |  |   | 367    |   |  |   | 14     |  
|Less: Total stock-based employee compensation expense determined under fair value based method, net of related taxes |  |                             | (390  | ) |                           |   | (231  | )    |  |   | (758   | ) |  |   | (497   | )
|                                                                                                                     |  |                             |       |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Pro forma net income                                                                                                 |  | $                           | 6,890 |   |                           | $ | 4,417 |      |  | $ | 11,916 |   |  | $ | 15,395 |  
|                                                                                                                     |  |                             |       |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Earnings per share:                                                                                                  |  |                             |       |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Basic- as reported                                                                                                   |  | $                           | 0.16  |   |                           | $ | 0.11  |      |  | $ | 0.28   |   |  | $ | 0.36   |  
|                                                                                                                     |  |                             |       |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Basic- pro forma                                                                                                     |  | $                           | 0.15  |   |                           | $ | 0.10  |      |  | $ | 0.27   |   |  | $ | 0.35   |  
|                                                                                                                     |  |                             |       |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Diluted - as reported                                                                                                |  | $                           | 0.16  |   |                           | $ | 0.10  |      |  | $ | 0.27   |   |  | $ | 0.36   |  
|                                                                                                                     |  |                             |       |   |                           |   |       |      |  |   |        |   |  |   |        |  
|Diluted - pro forma                                                                                                  |  | $                           | 0.15  |   |                           | $ | 0.10  |      |  | $ | 0.26   |   |  | $ | 0.34   |  
|                                                                                                                     |  |                             |       |   |                           |   |       |      |  |   |        |   |  |   |        |  



The Financial Accounting Standards
Board has issued a proposed statement, Share-Based Payment, that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b)
liabilities that are based on the fair value of the enterprises equity instruments or that may be settled by the issuance of such equity instruments. The proposed statement would eliminate the ability to account for share-based compensation
transactions using the intrinsic value-based method of accounting, and generally would require instead that such transactions be accounted for using a fair value-based method. The proposed statement would permit use of option pricing models other
than the Black-Scholes option pricing model. Management has not determined the impact of the proposed statement on the Companys Consolidated Financial Statements.



7



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##### Table of Contents

2. SECURITIES



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



|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|------------------------------------------------------------------ |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                                   |  | June 30, 2004    
|                                                                   |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                 |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of U.S. government agencies                            |  | $                 | 8,766   |                      | $ |                      |  | $ | (76        | ) |  | $ | 8,690  
|Obligations of states and political subdivisions                   |  |                   | 4,036   |                      |   | 97                    |  |   |           |   |  |   | 4,133  
|Mortgage-backed securities and collateralized mortgage obligations |  |                   | 445,193 |                      |   | 1,423                 |  |   | (8,072     | ) |  |   | 438,544
|Other securities                                                   |  |                   | 22,120  |                      |   | 596                   |  |   | (296       | ) |  |   | 22,420 
|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                              |  | $                 | 480,115 |                      | $ | 2,116                 |  | $ | (8,444     | ) |  | $ | 473,787
|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states and political subdivisions                   |  | $                 | 41,996  |                      | $ | 1,539                 |  | $ | (209       | ) |  | $ | 43,326 
|Mortgage-backed securities and collateralized mortgage obligations |  |                   | 3,389   |                      |   | 26                    |  |   | (3         | ) |  |   | 3,412  
|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                              |  | $                 | 45,385  |                      | $ | 1,565                 |  | $ | (212       | ) |  | $ | 46,738 
|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|                                                                   | 
|                                                                   |  | December 31, 2003
|                                                                   |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                 |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of U.S. government agencies                            |  | $                 | 86,006  |                      | $ | 141                   |  | $ | (39        | ) |  | $ | 86,108 
|Obligations of states and political subdivisions                   |  |                   | 4,255   |                      |   | 178                   |  |   |           |   |  |   | 4,433  
|Mortgage-backed securities and collateralized mortgage obligations |  |                   | 397,146 |                      |   | 2,793                 |  |   | (1,165     | ) |  |   | 398,774
|Other securities                                                   |  |                   | 33,798  |                      |   |                      |  |   | (177       | ) |  |   | 33,621 
|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                              |  | $                 | 521,205 |                      | $ | 3,112                 |  | $ | (1,381     | ) |  | $ | 522,936
|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states and political subdivisions                   |  | $                 | 38,336  |                      | $ | 2,367                 |  | $ |           |   |  | $ | 40,703 
|Mortgage-backed securities and collateralized mortgage obligations |  |                   | 3,821   |                      |   | 41                    |  |   | (4         | ) |  |   | 3,858  
|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                              |  | $                 | 42,157  |                      | $ | 2,408                 |  | $ | (4         | ) |  | $ | 44,561 
|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        



Declines in the fair value of
individual securities below their cost that are other-than-temporary would result in writedowns, as a realized loss, of the individual securities to their fair value. Management believes that the unrealized losses on the Companys investments
in U.S. government agencies, mortgage-backed securities and collateralized mortgage obligations were caused primarily by interest rate increases. Because the decline in market value is primarily attributable to changes in interest rates and not
credit quality, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2004.



8



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##### Table of Contents

The contractual maturities of securities available-for-sale and securities held-to-maturity at June 30, 2004, are shown
below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Dollar amounts are shown in thousands.



|                                                                   |  |                  |        |                    |   |               |  |            |         |  |   |        
|------------------------------------------------------------------ |  | ---------------- | ------ | ------------------ | - | ------------- |  | ---------- | ------- |  | - | -------
|                                                                   |  | Held-to-Maturity |        | Available-for-Sale
|                                                                   |  | AmortizedCost    |        | Fair Value         |   | AmortizedCost |  | Fair Value
|Due in one year or less                                            |  | $                | 5,362  |                    | $ | 5,428         |  | $          | 1,519   |  | $ | 1,527  
|Due after one year through five years                              |  |                  | 25,715 |                    |   | 26,950        |  |            | 9,663   |  |   | 9,643  
|Due after five years through ten years                             |  |                  | 10,311 |                    |   | 10,372        |  |            | 1,353   |  |   | 1,376  
|Due after ten years                                                |  |                  | 608    |                    |   | 576           |  |            | 267     |  |   | 277    
|Mortgage-backed securities and collateralized mortgage obligations |  |                  | 3,389  |                    |   | 3,412         |  |            | 445,193 |  |   | 438,544
|Other securities                                                   |  |                  |       |                    |   |              |  |            | 22,120  |  |   | 22,420 
|                                                                   |  |                  |        |                    |   |               |  |            |         |  |   |        
|Total                                                              |  | $                | 45,385 |                    | $ | 46,738        |  | $          | 480,115 |  | $ | 473,787
|                                                                   |  |                  |        |                    |   |               |  |            |         |  |   |        



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



|                      |  |                             |         |                           |      |   |      |  |   |         |   |  |   |       
|--------------------- |  | --------------------------- | ------- | ------------------------- | ---- | - | ---- |  | - | ------- | - |  | - | ------
|                      |  | Three months ended June 30, |         | Six months ended June 30,
|                      |  | 2004                        |         |                           | 2003 |   | 2004 |  |   | 2003   
|Proceeds from sales   |  | $                           | 134,090 |                           |      | $ |     |  | $ | 145,737 |   |  | $ | 16,870
|Gross realized gains  |  |                             | 4,981   |                           |      |   |     |  |   | 5,124   |   |  |   | 374   
|Gross realized losses |  |                             | (853    | )                         |      |   |     |  |   | (853    | ) |  |   |      



On April 29, 2004, the Company
securitized and sold $59.7 million of certain interest-only securities held in its available-for-sale portfolio. The Company received proceeds of $67.5 million and recognized a net after-tax securitization gain of $3.2 million for this transaction.
The Company did not retain any interests in the securities and neither the investors in the securitization trust nor the trust have any recourse other than for a breach of customary representations as to ownership and origination, but not for credit
loss or default.



The Company does not own any securities of any one
issuer (other than U.S. government and its agencies) of which aggregate adjusted cost exceeds 10% of the consolidated shareholders equity at June 30, 2004.



Securities with carrying values totaling $248.9 million and fair values totaling $248.2 million at June 30, 2004 were pledged to secure
public deposits.



9



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##### Table of Contents

3. LOANS



The loan portfolio consists of various types of loans made principally to borrowers located in the Houston, San Antonio and Dallas metropolitan areas, and is classified
by major type as follows (in thousands):



|                                           |  |               |           |   |                   |   |        |   |           |  |       |  
|------------------------------------------ |  | ------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                           |  | June 30, 2004 |           |   | December 31, 2003 |  
|                                           |  | Amount        |           | % |                   |   | Amount |   | %         | 
|Loans held for sale                        |  | $             | 13,895    |   | 0.6               | % |        | $ | 26,308    |  | 1.2   | %
|Loans held for investment                  |  |               |           |   |                   |   |        |   |           |  |       |  
|Domestic                                   |  |               |           |   |                   |   |        |   |           |  |       |  
|Commercial and industrial                  |  |               | 605,125   |   | 27.9              | % |        |   | 658,881   |  | 30.5  | %
|Real estate - commercial                   |  |               | 921,663   |   | 42.6              | % |        |   | 829,199   |  | 38.4  | %
|Real estate - residential mortgage         |  |               | 191,121   |   | 8.8               | % |        |   | 201,948   |  | 9.4   | %
|Real estate - construction and development |  |               | 326,112   |   | 15.0              | % |        |   | 327,295   |  | 15.2  | %
|Consumer, net                              |  |               | 98,896    |   | 4.6               | % |        |   | 104,944   |  | 4.9   | %
|Foreign                                    |  |               |           |   |                   |   |        |   |           |  |       |  
|Commercial and industrial                  |  |               | 9,930     |   | 0.5               | % |        |   | 7,886     |  | 0.4   | %
|Other loans                                |  |               | 742       |   | 0.0               | % |        |   | 578       |  | 0.0   | %
|                                           |  |               |           |   |                   |   |        |   |           |  |       |  
|Total loans held for investment            |  |               | 2,153,589 |   | 99.4              | % |        |   | 2,130,731 |  | 98.8  | %
|                                           |  |               |           |   |                   |   |        |   |           |  |       |  
|Total loans                                |  | $             | 2,167,484 |   | 100.0             | % |        | $ | 2,157,039 |  | 100.0 | %
|                                           |  |               |           |   |                   |   |        |   |           |  |       |  



Loan maturities and rate sensitivities
of the commercial loan portfolio which excludes real estate residential mortgage and consumer loans, at June 30, 2004 are as follows (in thousands):



|                                           |  |                        |           |                                    |   |                     |  |       |        |  |   |          
|------------------------------------------ |  | ---------------------- | --------- | ---------------------------------- | - | ------------------- |  | ----- | ------ |  | - | ---------
|                                           |  | Due in OneYear or Less |           | Due AfterOne YearThrough FiveYears |   | Due AfterFive Years |  | Total
|Commercial and industrial                  |  | $                      | 477,287   |                                    | $ | 128,982             |  | $     | 4,692  |  | $ | 610,961  
|Real estate - commercial                   |  |                        | 555,148   |                                    |   | 312,367             |  |       | 61,501 |  |   | 929,016  
|Real estate - construction and development |  |                        | 256,198   |                                    |   | 57,071              |  |       | 13,549 |  |   | 326,818  
|Foreign loans                              |  |                        | 9,257     |                                    |   | 1,415               |  |       |       |  |   | 10,672   
|                                           |  |                        |           |                                    |   |                     |  |       |        |  |   |          
|Total                                      |  | $                      | 1,297,890 |                                    | $ | 499,835             |  | $     | 79,742 |  | $ | 1,877,467
|                                           |  |                        |           |                                    |   |                     |  |       |        |  |   |          
|Loans with a fixed interest rate           |  | $                      | 215,003   |                                    | $ | 490,830             |  | $     | 79,684 |  | $ | 785,517  
|Loans with a floating interest rate        |  |                        | 1,082,887 |                                    |   | 9,005               |  |       | 58     |  |   | 1,091,950
|                                           |  |                        |           |                                    |   |                     |  |       |        |  |   |          
|Total                                      |  | $                      | 1,297,890 |                                    | $ | 499,835             |  | $     | 79,742 |  | $ | 1,877,467
|                                           |  |                        |           |                                    |   |                     |  |       |        |  |   |          



As of June 30, 2004 and December 31,
2003, loans from Sterling Bank outstanding to directors, officers and their affiliates were $11.1 million and $11.9 million, respectively. In the opinion of management, all transactions entered into between Sterling Bank and such related parties
have been and are, in the ordinary course of business, made on the same terms and conditions as similar transactions with unaffiliated persons. For the six months ended June 30, 2004, total principal additions were $625 thousand and principal
payments were $1.5 million.



The recorded investment in impaired loans is $12.2
million and $35.7 million, at June 30, 2004 and December 31, 2003, respectively. Such impaired loans required an allowance for credit losses of approximately $6.3 million and $17.6 million, respectively. The average recorded investment in impaired
loans for the six months ended June 30, 2004 was $8.4 million. Interest income on impaired loans of $67 thousand was recognized for cash payments received for the six months ended June 30, 2004.



Included in impaired loans are nonperforming loans of $10.8 million and $33.9 million at June
30, 2004 and December 31, 2003, respectively, which have been categorized by management as nonaccrual. For the six months ended June 30, 2004, interest foregone on nonaccrual loans was approximately $457.7 thousand. The Company did not have any
restructured loans as of June 30, 2004 or December 31, 2003.



Loans 90 days or
more past due, not on nonaccrual were $4.0 million and $35 thousand at June 30, 2004 and December 31, 2003, respectively. The amount for June 30, 2004 consisted primarily of one relationship totaling $3.9 million. This relationship is expected to be
renewed.



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4. ALLOWANCE FOR CREDIT LOSSES



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



|                                                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------ |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                             |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                             |  | 2004                       |        |   | 2003                     |   |        | 2004 |  |   | 2003   |  
|Balance at beginning of the period                           |  | $                          | 26,609 |   |                          | $ | 28,429 |      |  | $ | 30,722 |   |  | $ | 27,248 |  
|Provision for credit losses                                  |  |                            | 2,781  |   |                          |   | 6,098  |      |  |   | 6,281  |   |  |   | 10,548 |  
|                                                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Loans charged off                                            |  |                            | 2,843  |   |                          |   | 3,595  |      |  |   | 11,211 |   |  |   | 6,793  |  
|Loan recoveries                                              |  |                            | (782   | ) |                          |   | (642   | )    |  |   | (1,537 | ) |  |   | (924   | )
|                                                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Net loans charged off                                        |  |                            | 2,061  |   |                          |   | 2,953  |      |  |   | 9,674  |   |  |   | 5,869  |  
|Allowance for credit losses associated with divested offices |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   | (353   | )
|                                                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Balance at end of the period                                 |  | $                          | 27,329 |   |                          | $ | 31,574 |      |  | $ | 27,329 |   |  | $ | 31,574 |  
|                                                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  



5. PREMISES AND EQUIPMENT



Premises and equipment are summarized as follows (in thousands):



|                                               |  |              |         |   |                  |   |         |  
|---------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                               |  | June 30,2004 |         |   | December 31,2003 |  
|Land                                           |  | $            | 10,707  |   |                  | $ | 14,173  |  
|Buildings and improvements                     |  |              | 40,487  |   |                  |   | 39,773  |  
|Furniture, fixtures and equipment              |  |              | 41,808  |   |                  |   | 40,071  |  
|                                               |  |              |         |   |                  |   |         |  
|                                               |  |              | 93,002  |   |                  |   | 94,017  |  
|Less accumulated depreciation and amortization |  |              | (49,323 | ) |                  |   | (45,476 | )
|                                               |  |              |         |   |                  |   |         |  
|Total                                          |  | $            | 43,679  |   |                  | $ | 48,541  |  
|                                               |  |              |         |   |                  |   |         |  



Depreciation and amortization of
premises and equipment totaled $2.1 million and $4.2 million for the three and six months ended June 30, 2004 and $2.1 million and $4.2 million for the three and six months ended June 30, 2003.



The Company evaluates for impairment its long-lived assets to be held and used, and
long-lived assets to be disposed of, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is determined using the undiscounted operating cash flows estimated over the remaining
useful life of the related long-lived asset and the eventual disposal. In the event of impairment, the asset is written down to its fair market value. Assets to be disposed of are recorded at the lower of net book value or fair market value less
cost to sell and are classified as assets held for sale on the consolidated balance sheet at the date management commits to a plan of disposal. In June 2004, the Company recorded impairment charges of $1.1 million for a bank office building and one
tract of unused land which the Company intends to sale. At June 30, 2004, the bank office building is included in premises and equipment since the Company has not committed to a plan of sale. The Company reclassified $3.0 million of land to
held-for-sale which is included in other assets on the consolidated balance sheet at June 30, 2004.



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6. GOODWILL AND OTHER INTANGIBLES



The changes in the carrying amount of goodwill by reporting unit for the year ended December 31, 2003 and the period ended June 30, 2004 are
as follows (in thousands):



|                                |  |         |        |             |   |        |        |  |             |       |  |       |        |   |  |   |        |  
|------------------------------- |  | ------- | ------ | ----------- | - | ------ | ------ |  | ----------- | ----- |  | ----- | ------ | - |  | - | ------ | -
|                                |  | Houston |        | San Antonio |   |        | Dallas |  | South Texas |       |  | Total |       
|Balance, January 1, 2003        |  | $       | 29,613 |             | $ | 15,079 |        |  | $           | 5,662 |  | $     | 5,312  |   |  | $ | 55,666 |  
|Sale of rural banking offices   |  |         |       |             |   |       |        |  |             |      |  |       | (5,312 | ) |  |   | (5,312 | )
|Plaza Bank acquisition          |  |         |       |             |   | 12,579 |        |  |             |      |  |       |       |   |  |   | 12,579 |  
|                                |  |         |        |             |   |        |        |  |             |       |  |       |        |   |  |   |        |  
|Balance, December 31, 2003      |  |         | 29,613 |             |   | 27,658 |        |  |             | 5,662 |  |       |       |   |  |   | 62,933 |  
|Plaza Bank goodwill adjustments |  |         |       |             |   | (453   | )      |  |             |      |  |       |       |   |  |   | (453   | )
|                                |  |         |        |             |   |        |        |  |             |       |  |       |        |   |  |   |        |  
|Balance, June 30, 2004          |  | $       | 29,613 |             | $ | 27,205 |        |  | $           | 5,662 |  | $     |       |   |  | $ | 62,480 |  
|                                |  |         |        |             |   |        |        |  |             |       |  |       |        |   |  |   |        |  



The changes in the carrying amounts of
core deposit intangibles for the year ended December 31, 2003 and six months ended June 30, 2004 are as follows (in thousands):



|                           |  |                        |       |  
|-------------------------- |  | ---------------------- | ----- | -
|                           |  | CoreDepositIntangibles |      
|Balance, January 1, 2003   |  | $                      | 2,096 |  
|Amortization expense       |  |                        | (465  | )
|Plaza Bank acquisition     |  |                        | 695   |  
|                           |  |                        |       |  
|Balance, December 31, 2003 |  |                        | 2,326 |  
|Amortization expense       |  |                        | (248  | )
|                           |  |                        |       |  
|Balance, June 30, 2004     |  | $                      | 2,078 |  
|                           |  |                        |       |  



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7. EARNINGS PER COMMON SHARE



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



|                                                  |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|------------------------------------------------- |  | --------------------------- | ------ | ---- | ------------------------- | ------ | ---- |  | ---- | ------ |  | - | ------
|                                                  |  | Three months ended June 30, |        |      | Six months ended June 30,
|                                                  |  | 2004                        |        | 2003 |                           |        | 2004 |  | 2003
|Income from continuing operations                 |  | $                           | 7,073  |      | $                         | 6,191  |      |  | $    | 12,307 |  | $ | 15,732
|Income from discontinued operations               |  |                             |       |      |                           | (1,550 | )    |  |      |       |  |   | 146   
|                                                  |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Net income                                        |  | $                           | 7,073  |      | $                         | 4,641  |      |  | $    | 12,307 |  | $ | 15,878
|                                                  |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Basic:                                            |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Weighted average shares outstanding               |  |                             | 44,796 |      |                           | 44,101 |      |  |      | 44,748 |  |   | 44,044
|Diluted:                                          |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Add incremental shares for:                       |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Assumed exercise of outstanding options           |  |                             | 418    |      |                           | 622    |      |  |      | 424    |  |   | 636   
|Assumed conversion of preferred stock             |  |                             | 20     |      |                           | 21     |      |  |      | 20     |  |   | 40    
|                                                  |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Total                                             |  |                             | 45,234 |      |                           | 44,744 |      |  |      | 45,192 |  |   | 44,720
|                                                  |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Earnings per share from continuing operations:    |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Basic                                             |  | $                           | 0.16   |      | $                         | 0.14   |      |  | $    | 0.28   |  | $ | 0.36  
|                                                  |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Diluted                                           |  | $                           | 0.16   |      | $                         | 0.14   |      |  | $    | 0.27   |  | $ | 0.35  
|                                                  |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Earnings per share from discountinued operations: |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Basic                                             |  | $                           |       |      | $                         | (0.04  | )    |  | $    |       |  | $ |      
|                                                  |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Diluted                                           |  | $                           |       |      | $                         | (0.03  | )    |  | $    |       |  | $ |      
|                                                  |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Earnings per share:                               |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Basic                                             |  | $                           | 0.16   |      | $                         | 0.11   |      |  | $    | 0.28   |  | $ | 0.36  
|                                                  |  |                             |        |      |                           |        |      |  |      |        |  |   |       
|Diluted                                           |  | $                           | 0.16   |      | $                         | 0.10   |      |  | $    | 0.27   |  | $ | 0.36  
|                                                  |  |                             |        |      |                           |        |      |  |      |        |  |   |       



The incremental shares for the assumed
exercise of the outstanding options were determined by application of the treasury stock method. The incremental shares for the conversion of the preferred stock were determined assuming applicable performance goals had been met. The calculation of
the diluted EPS excludes 323,283 and 256,038 options for the three and six months ended June 30, 2004 and 581,213 options outstanding for both the three and six months ended June 30, 2003 which were antidilutive.



8. COMMITMENTS AND CONTINGENCIES



Leases  The Company leases certain office facilities and equipment under
operating leases. Rent expense under all noncancelable operating lease obligations, net of income from noncancelable subleases aggregated, was approximately $1.0 million and $1.7 million for the three and six months ended June 30, 2004 and $1.0
million and $2.0 million for the three and six months period ended June 30, 2003. There have been no significant change in future minimum lease payments by the Company since December 31, 2003. Refer to the 2003 Form 10-K for information regarding
these commitments.



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



9. FINANCIAL INSTRUMENTS WITH
OFF-BALANCE SHEET RISK



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



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



|                             |  |              |         |                   |   |        
|---------------------------- |  | ------------ | ------- | ----------------- | - | -------
|                             |  | June 30,2004 |         | December 31, 2003
|Commitments to extend credit |  | $            | 563,749 |                   | $ | 483,046
|Standby letters of credit    |  |              | 23,391  |                   |   | 24,455 



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



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



9. REGULATORY MATTERS



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



To meet the capital adequacy requirements,
Sterling Bancshares and the Bank must maintain minimum capital amounts and ratios as defined in the regulations. Management believes, as of June 30, 2004 and December 31, 2003, that Sterling Bancshares and the Bank met all capital adequacy
requirements to which they are subject.



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



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|                                         |  |                                           |         |       |                             |   |        |                                                                                |         |  |     |        |  |       |         |  |      |  
|---------------------------------------- |  | ----------------------------------------- | ------- | ----- | --------------------------- | - | ------ | ------------------------------------------------------------------------------ | ------- |  | --- | ------ |  | ----- | ------- |  | ---- | -
|                                         |  | Actual                                    |         |       | For CapitalAdequacyPurposes |   |        | To Be Categorized as Well Capitalized Under Prompt CorrectiveAction
Provisions |        
|                                         |  | Amount                                    |         | Ratio |                             |   | Amount |                                                                                | Ratio   |  |     | Amount |  | Ratio |        
|                                         |  | (In thousands, except percentage amounts) |        
|CONSOLIDATED:                            |  |                                           |         |       |                             |   |        |                                                                                |         |  |     |        |  |       |         |  |      |  
|As of June 30, 2004:                     |  |                                           |         |       |                             |   |        |                                                                                |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 389,209 |       | 15.5                        | % |        | $                                                                              | 201,278 |  | 8.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 316,626 |       | 12.6                        | % |        |                                                                                | 100,639 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 316,626 |       | 10.3                        | % |        |                                                                                | 122,886 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|                                         |  |                                           |         |       |                             |  
|As of December 31, 2003:                 |  |                                           |         |       |                             |   |        |                                                                                |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 383,252 |       | 15.4                        | % |        | $                                                                              | 199,095 |  | 8.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 305,997 |       | 12.3                        | % |        |                                                                                | 99,547  |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 305,997 |       | 10.4                        | % |        |                                                                                | 117,883 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|                                         |  |                                           |         |       |                             |  
|STERLING BANK:                           |  |                                           |         |       |                             |   |        |                                                                                |         |  |     |        |  |       |         |  |      |  
|As of June 30, 2004:                     |  |                                           |         |       |                             |   |        |                                                                                |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 383,235 |       | 15.3                        | % |        | $                                                                              | 200,787 |  | 8.0 | %      |  | $     | 250,984 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 310,652 |       | 12.4                        | % |        |                                                                                | 100,394 |  | 4.0 | %      |  |       | 150,590 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 310,652 |       | 10.1                        | % |        |                                                                                | 122,639 |  | 4.0 | %      |  |       | 153,299 |  | 5.0  | %
|                                         |  |                                           |         |       |                             |  
|As of December 31, 2003:                 |  |                                           |         |       |                             |   |        |                                                                                |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 372,563 |       | 15.4                        | % |        | $                                                                              | 193,441 |  | 8.0 | %      |  | $     | 241,802 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 296,147 |       | 12.3                        | % |        |                                                                                | 96,721  |  | 4.0 | %      |  |       | 145,081 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 296,147 |       | 10.3                        | % |        |                                                                                | 115,542 |  | 4.0 | %      |  |       | 144,427 |  | 5.0  | %
|                                         |  |                                           |         |       |                             |  
|PLAZA BANK:                              |  |                                           |         |       |                             |   |        |                                                                                |         |  |     |        |  |       |         |  |      |  
|As of December 31, 2003:                 |  |                                           |         |       |                             |   |        |                                                                                |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 6,506   |       | 8.1                         | % |        | $                                                                              | 6,443   |  | 8.0 | %      |  | $     | 8,054   |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 5,668   |       | 7.0                         | % |        |                                                                                | 3,221   |  | 4.0 | %      |  |       | 4,832   |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 5,668   |       | 8.0                         | % |        |                                                                                | 2,844   |  | 4.0 | %      |  |       | 3,555   |  | 5.0  | %



As discussed in Note 1, the Company
adopted FIN 46R on January 1, 2004. FIN 46R requires that trust preferred securities be deconsolidated from the Companys Consolidated Financial Statements. Trust preferred securities are considered currently in calculating Tier 1 capital
ratios. In May 2004, the Federal Reserve released proposed rules for the capital treatment of trust preferred securities. The proposed rules would limit the aggregate amount of trust preferred securities and certain other capital elements to 25% of
Tier 1 capital, net of goodwill. At June 30, 2004 approximately $59.1 million of trust preferred securities would count as Tier 1 capital. The excess amount of trust preferred securities not qualifying for Tier 1 capital may be included in Tier II
capital. This amount is limited to 50% of Tier 1 capital. There is a three-year transition period for banks to become compliant with the new rules. Additionally, the rules provide that trust preferred securities no longer qualify for Tier 1 capital
within 5 years of their maturity. Under the proposed rules, the Companys consolidated capital ratios at June 30, 2004 would have been:



|                                         |  |      |  
|---------------------------------------- |  | ---- | -
|Pro forma ratio:                         |  |      |  
|Total capital (to risk weighted assets)  |  | 15.5 | %
|Tier 1 capital (to risk weighted assets) |  | 11.8 | %
|Tier 1 capital (to average assets)       |  | 9.4  | %



15



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##### Table of Contents

11. DISCONTINUED OPERATIONS



The Company sold its mortgage-banking operations on September 30, 2003 to RBC Mortgage Company, an indirect subsidiary of the Royal Bank of
Canada. The mortgage-banking operations were previously reported as the Companys mortgage-banking segment and are now reported as discontinued operations. Income (loss) from discontinued operations for the three and six months ended June 30,
2003, are as follows (in thousands):



|                                                               |  |                                  |        |   |                               |   |        |  
|-------------------------------------------------------------- |  | -------------------------------- | ------ | - | ----------------------------- | - | ------ | -
|                                                               |  | Three Months Ended June 30, 2003 |        |   | Six Months EndedJune 30, 2003 |  
|Net interest income (loss) after provision for credit losses   |  | $                                | (2,766 | ) |                               | $ | (3,708 | )
|Noninterest income:                                            |  |                                  |        |   |                               |   |        |  
|Gain on sale of mortgage loans                                 |  |                                  | 13,813 |   |                               |   | 25,384 |  
|Mortgage origination income                                    |  |                                  | 9,422  |   |                               |   | 17,595 |  
|Other                                                          |  |                                  | 2,788  |   |                               |   | 5,175  |  
|                                                               |  |                                  |        |   |                               |   |        |  
|Total noninterest income                                       |  |                                  | 26,023 |   |                               |   | 48,154 |  
|                                                               |  |                                 
|Noninterest expense:                                           |  |                                  |        |   |                               |   |        |  
|Salaries and employee benefits                                 |  |                                  | 8,104  |   |                               |   | 16,141 |  
|Occupancy expense                                              |  |                                  | 3,215  |   |                               |   | 6,064  |  
|Mortgage servicing rights amortization and impairment          |  |                                  | 11,556 |   |                               |   | 15,460 |  
|Technology                                                     |  |                                  | 286    |   |                               |   | 579    |  
|Professional fees                                              |  |                                  | 207    |   |                               |   | 432    |  
|Postage, delivery and supplies                                 |  |                                  | 890    |   |                               |   | 1,758  |  
|Minority interest expense                                      |  |                                  | (387   | ) |                               |   | 37     |  
|Other                                                          |  |                                  | 1,920  |   |                               |   | 3,682  |  
|                                                               |  |                                  |        |   |                               |   |        |  
|Total noninterest expense                                      |  |                                  | 25,791 |   |                               |   | 44,153 |  
|                                                               |  |                                 
|Income (loss) from discontinued operations before income taxes |  |                                  | (2,534 | ) |                               |   | 293    |  
|Provision (benefit) for income taxes                           |  |                                  | (984   | ) |                               |   | 147    |  
|                                                               |  |                                  |        |   |                               |   |        |  
|Income (loss) from discontinued operations                     |  | $                                | (1,550 | ) |                               | $ | 146    |  
|                                                               |  |                                  |        |   |                               |   |        |  
|Earnings per share from discontinued operations:               |  |                                  |        |   |                               |   |        |  
|Basic                                                          |  | $                                | (0.04  | ) |                               | $ |       |  
|                                                               |  |                                  |        |   |                               |   |        |  
|Diluted                                                        |  | $                                | (0.03  | ) |                               | $ |       |  
|                                                               |  |                                  |        |   |                               |   |        |  



12. DIVESTITURE OF BANKING OFFICES



On March 20, 2003, the Company sold one of its banking offices located in
a rural area for a pre-tax gain of $3.4 million. At the sale date, this banking office had approximately $18.7 million in assets, $16.8 million in loans and $95.7 million of deposits that were included in the sale transaction.



On May 8, 2003, the Company completed the sale of three banking offices located in rural
areas. Assets of $16.6 million, loans of $15.2 million and deposits of $42.1 million were sold in the transaction. A pre-tax loss of $142 thousand was recorded on the sale during the second quarter of 2003.



These banking offices, located in rural areas, were sold because their locations and growth
potential did not align with the Companys business banking strategy. These offices were acquired originally as part of a previous acquisition. The net gain (loss) was determined based on the Companys recorded investment in these offices
including allocated goodwill and intangibles.



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



FORWARD-LOOKING STATEMENTS



This report may contain certain statements relating to the future results of the Company based upon information currently available. These forward-looking
statements (as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act) are typically identified by words such as expects, anticipates, intends,
plans, believes, seeks, estimates, or words of similar meaning, or future or conditional verbs such as will, would, should, could, or may.



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



| |  | general business and economic conditions in the markets we serve may be less favorable than anticipated which could decrease the demand for loan, deposit and other financial
services and increase loan delinquencies and defaults;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | changes in market rates and prices may adversely impact the value of securities, loans, deposits and other financial instruments;
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| |  | our liquidity requirements could be adversely affected by changes in our assets and liabilities;
| | - | ------------------------------------------------------------------------------------------------



| |  | the effect of legislative or regulatory developments including changes in laws concerning taxes, banking, securities, insurance and other aspects of the financial securities
industry;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | competitive factors, including product and pricing pressures among financial services organizations, may increase;
| | - | ------------------------------------------------------------------------------------------------------------------



| |  | the effect of changes in accounting policies and practices, as may be adopted by regulatory agencies, as well as the Financial Accounting Standards Board and other accounting
regulatory agencies; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the effect of fiscal and governmental policies of the United States federal government.
| | - | ---------------------------------------------------------------------------------------



For additional discussion of such risks, uncertainties and assumptions, see the Companys Annual Report on Form 10-K for the year ended
December 31, 2003, filed with the Securities and Exchange Commission.



OVERVIEW



We are a bank holding company headquartered in
Houston, Texas that provides a range of commercial and consumer banking services through our subsidiary, Sterling Bank. We operate 37 banking offices in the greater metropolitan areas of Houston, San Antonio and Dallas. At June 30, 2004, the Company
had consolidated total assets of $3.1 billion, total loans of $2.2 billion, deposits of $2.5 billion and shareholders equity of $297.3 million.



Our net income for the second quarter of 2004 was $7.1 million, compared to $4.6 million for the second quarter of 2003. Net income for the second quarter of 2003
included a loss from discontinued operations after taxes of $1.6 million. Net income for the second quarter of 2004 included:



| |  | an after-tax gain of $3.2 million, or $0.07 per diluted share, related to the securitization and sale of certain interest-only securities,
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| |  | losses of $554 thousand, or $0.01 per diluted share, after-taxes for the sale of U.S. Treasury securities, and
| | - | --------------------------------------------------------------------------------------------------------------



| |  | impairment charges on certain bank properties of $721 thousand, or $0.02 per diluted share, net of taxes.
| | - | ---------------------------------------------------------------------------------------------------------



Net income for the six-month period ended June 30, 2004 was $12.3 million as compared to $15.9 million for the same period ended June 30,
2003.



During the second quarter of 2004, we made further improvements in asset
quality. Nonperforming assets decreased 28% as compared with March 31, 2004 and 45% from June 30, 2003. At June 30, 2004, the allowance for credit losses was 1.26% of total loans.



We also expanded our expense management initiative during the second quarter of 2004. After a thorough review by management and employees,
numerous expense reduction and alignment projects were identified including the consolidation of smaller offices, disposition of unprofitable initiatives, modification of certain perquisite benefit programs and continued reductions of staffing
levels through attrition. We will implement these projects during the remainder of 2004. These are expected to reduce our current non-interest expense base in 2004 and allow for greater control of expense growth in 2005.



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CRITICAL ACCOUNTING POLICIES



The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires
management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in our Consolidated Financial Statements and accompanying notes. We believe that the judgments, estimates
and assumptions used in the preparation of our Consolidated Financial Statements are appropriate given the factual circumstances as of June 30, 2004.



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



These policies and the judgments, estimates and assumptions are described in greater detail
in the Companys 2003 Annual Report on Form 10-K in the Critical Accounting Estimates section of Managements Discussion and Analysis and in Note 1 to the Consolidated Financial Statements  Organization and Summary
of Significant Accounting and Reporting Policies. There have been no material changes in these policies since December 31, 2003.



RECENT ACCOUNTING STANDARDS



On January 1, 2004, we adopted FIN 46R, Consolidation of Variable Interest Entities. Upon adoption, the trusts that previously issued the outstanding
company-obligated mandatorily redeemable trust preferred securities were deconsolidated from our Consolidated Financial Statements. Instead, the junior subordinated debentures issued by the Company to these subsidiary trusts are shown as liabilities
in the consolidated balance sheets and interest expense associated with the junior subordinated debentures are shown in the consolidated statements of income. The Consolidated Financial Statements have been restated to reflect the adoption of FIN
46R. Adoption of FIN 46R did not affect previously reported amounts for net income or shareholders equity.



In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 03-3 (SOP 03-3), Accounting for Certain Loans
or Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for differences between the contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are
attributable, in part, to credit quality. SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on the present value of the cash flows expected to be collected with no carryover of any valuation allowance
previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the purchased loans experience subsequent deterioration in credit quality, a
valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows subsequently are expected to be received than originally estimated, the effective yield would be adjusted on a
prospective basis. SOP 03-3 will be effective for loans and debt securities acquired after December 31, 2004. We do not expect the requirements of SOP 03-3 to have a material impact on our financial condition or results of operations.



SEC Staff Accounting Bulletin (SAB) No. 105, Application of Accounting Principles to Loan
Commitments(SAB 105) addresses the application of generally accepted accounting principles to loan commitments accounted for as derivative instruments. SAB 105 provides that the fair value of recorded loan commitments to be
held for sale that are accounted for as derivatives should not incorporate the expected future cash flows related to the associated servicing of the future loan. In addition, SAB 105 requires registrants to disclose their accounting policy for loan
commitments. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. SAB 105 did not have a material impact on the Companys Consolidated Financial Statements.



In March 2004, the Emerging Issues Task Force reached a consensus on Issue No.
03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This Issue provides guidance for determining when an investment is other-than-temporarily impaired. This Issue specifically addresses whether an
investor has the ability and intent to hold an investment until recovery. In addition, Issue 03-1 contains disclosure requirements that provide useful information about impairments that have not been recognized as other-than-temporary for
investments within the scope of this Issue. The guidance for evaluating whether an investment is other-than-temporarily impaired should be applied in reporting periods beginning after June 15, 2004. Management has not determined the impact of the
proposed guidance on the Companys Consolidated Financial Statements.



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SELECTED FINANCIAL DATA



|                                                      |  |                                               |           |   |                           |   |           |                             |  |   |           |   |  |   |           |   |  |   |           |  
|----------------------------------------------------- |  | --------------------------------------------- | --------- | - | ------------------------- | - | --------- | --------------------------- |  | - | --------- | - |  | - | --------- | - |  | - | --------- | -
|                                                      |  | Three Months Ended June 30,                   |           |   | Six Months Ended June 30, |   |           | Year EndedDecember 31, 2003 | 
|                                                      |  | 2004                                          |           |   | 2003                      |   |           | 2004                        |  |   | 2003      |   | 
|                                                      |  | ( In thousands, except for per share amounts) |          
|INCOME STATEMENT DATA:                                |  |                                               |           |   |                           |   |           |                             |  |   |           |   |  |   |           |   |  |   |           |  
|Net interest income                                   |  | $                                             | 32,346    |   |                           | $ | 35,734    |                             |  | $ | 65,367    |   |  | $ | 71,259    |   |  | $ | 138,235   |  
|Provision for credit losses                           |  |                                               | 2,781     |   |                           |   | 6,098     |                             |  |   | 6,281     |   |  |   | 10,548    |   |  |   | 17,698    |  
|Noninterest income                                    |  |                                               | 10,777    |   |                           |   | 7,087     |                             |  |   | 17,994    |   |  |   | 18,363    |   |  |   | 33,270    |  
|Noninterest expense                                   |  |                                               | 30,085    |   |                           |   | 27,504    |                             |  |   | 59,147    |   |  |   | 55,595    |   |  |   | 111,416   |  
|Income from continuing operations before income taxes |  |                                               | 10,257    |   |                           |   | 9,219     |                             |  |   | 17,933    |   |  |   | 23,479    |   |  |   | 42,391    |  
|Income from continuing operations                     |  |                                               | 7,073     |   |                           |   | 6,191     |                             |  |   | 12,307    |   |  |   | 15,732    |   |  |   | 28,354    |  
|Income from discontinued operations                   |  |                                               |          |   |                           |   | (1,550    | )                           |  |   |          |   |  |   | 146       |   |  |   | 20,756    |  
|Net income                                            |  |                                               | 7,073     |   |                           |   | 4,641     |                             |  |   | 12,307    |   |  |   | 15,878    |   |  |   | 49,110    |  
|BALANCE SHEET DATA (at period-end):                   |  |                                               |           |   |                           |   |           |                             |  |   |           |   |  |   |           |   |  |   |           |  
|Total assets                                          |  | $                                             | 3,090,208 |   |                           | $ | 3,447,641 |                             |  | $ | 3,090,208 |   |  | $ | 3,447,641 |   |  | $ | 3,206,880 |  
|Total loans                                           |  |                                               | 2,167,484 |   |                           |   | 2,646,486 |                             |  |   | 2,167,484 |   |  |   | 2,646,486 |   |  |   | 2,157,039 |  
|Allowance for credit losses                           |  |                                               | (27,329   | ) |                           |   | (31,574   | )                           |  |   | (27,329   | ) |  |   | (31,574   | ) |  |   | (30,722   | )
|Total securities                                      |  |                                               | 519,172   |   |                           |   | 279,258   |                             |  |   | 519,172   |   |  |   | 279,258   |   |  |   | 565,093   |  
|Total deposits                                        |  |                                               | 2,488,605 |   |                           |   | 2,593,816 |                             |  |   | 2,488,605 |   |  |   | 2,593,816 |   |  |   | 2,418,369 |  
|Other borrowed funds                                  |  |                                               | 149,750   |   |                           |   | 402,800   |                             |  |   | 149,750   |   |  |   | 402,800   |   |  |   | 324,160   |  
|Notes payable                                         |  |                                               |          |   |                           |   | 18,694    |                             |  |   |          |   |  |   | 18,694    |   |  |   |          |  
|Subordinated debt                                     |  |                                               | 45,254    |   |                           |   | 49,254    |                             |  |   | 45,254    |   |  |   | 49,254    |   |  |   | 46,533    |  
|Junior subordinated debt                              |  |                                               | 82,475    |   |                           |   | 82,475    |                             |  |   | 82,475    |   |  |   | 82,475    |   |  |   | 82,475    |  
|Shareholders equity                                  |  |                                               | 297,264   |   |                           |   | 261,514   |                             |  |   | 297,264   |   |  |   | 261,514   |   |  |   | 292,596   |  
|                                                      |  |                                               |           |   |                          
|COMMON SHARE DATA:                                    |  |                                               |           |   |                           |   |           |                             |  |   |           |   |  |   |           |   |  |   |           |  
|Earnings per share from continuing operations (1)     |  |                                               |           |   |                           |   |           |                             |  |   |           |   |  |   |           |   |  |   |           |  
|Basic                                                 |  | $                                             | 0.16      |   |                           | $ | 0.14      |                             |  | $ | 0.28      |   |  | $ | 0.36      |   |  | $ | 0.64      |  
|Diluted                                               |  |                                               | 0.16      |   |                           |   | 0.14      |                             |  |   | 0.27      |   |  |   | 0.35      |   |  |   | 0.64      |  
|Earnings per share from discontinued operations (1)   |  |                                               |           |   |                           |   |           |                             |  |   |           |   |  |   |           |   |  |   |           |  
|Basic                                                 |  |                                               |          |   |                           |   | (0.04     | )                           |  |   |          |   |  |   |          |   |  |   | 0.47      |  
|Diluted                                               |  |                                               |          |   |                           |   | (0.03     | )                           |  |   |          |   |  |   |          |   |  |   | 0.46      |  
|Earnings per share (1)                                |  |                                               |           |   |                           |   |           |                             |  |   |           |   |  |   |           |   |  |   |           |  
|Basic                                                 |  |                                               | 0.16      |   |                           |   | 0.11      |                             |  |   | 0.28      |   |  |   | 0.36      |   |  |   | 1.11      |  
|Diluted                                               |  |                                               | 0.16      |   |                           |   | 0.10      |                             |  |   | 0.27      |   |  |   | 0.36      |   |  |   | 1.10      |  
|Shares used in computing earnings per common share    |  |                                               |           |   |                           |   |           |                             |  |   |           |   |  |   |           |   |  |   |           |  
|Basic                                                 |  |                                               | 44,796    |   |                           |   | 44,101    |                             |  |   | 44,748    |   |  |   | 44,044    |   |  |   | 44,180    |  
|Diluted                                               |  |                                               | 45,234    |   |                           |   | 44,744    |                             |  |   | 45,192    |   |  |   | 44,720    |   |  |   | 44,648    |  
|End of period common shares outstanding               |  |                                               | 44,853    |   |                           |   | 44,159    |                             |  |   | 44,853    |   |  |   | 44,159    |   |  |   | 44,642    |  
|Book value per common share at period-end             |  |                                               |           |   |                           |   |           |                             |  |   |           |   |  |   |           |   |  |   |           |  
|Total                                                 |  | $                                             | 6.62      |   |                           | $ | 5.92      |                             |  | $ | 6.62      |   |  | $ | 5.92      |   |  | $ | 6.55      |  
|Tangible                                              |  |                                               | 5.18      |   |                           |   | 4.73      |                             |  |   | 5.18      |   |  |   | 4.73      |   |  |   | 5.09      |  
|Cash dividends paid per common share                  |  |                                               | 0.050     |   |                           |   | 0.045     |                             |  |   | 0.100     |   |  |   | 0.090     |   |  |   | 0.180     |  
|Common stock dividend payout ratio                    |  |                                               | 31.66     | % |                           |   | 42.73     | %                           |  |   | 36.34     | % |  |   | 24.95     | % |  |   | 16.19     | %
|                                                      |  |                                               |           |   |                          
|SELECTED PERFORMANCE RATIOS AND OTHER DATA:           |  |                                               |           |   |                           |   |           |                             |  |   |           |   |  |   |           |   |  |   |           |  
|Return on average common equity (2)                   |  |                                               |           |   |                           |   |           |                             |  |   |           |   |  |   |           |   |  |   |           |  
|Total                                                 |  |                                               | 9.45      | % |                           |   | 7.06      | %                           |  |   | 8.28      | % |  |   | 12.35     | % |  |   | 18.18     | %
|Continuing                                            |  |                                               | 9.45      | % |                           |   | 9.42      | %                           |  |   | 8.28      | % |  |   | 12.23     | % |  |   | 10.50     | %
|Return on average assets (2)                          |  |                                               |           |   |                           |   |           |                             |  |   |           |   |  |   |           |   |  |   |           |  
|Total                                                 |  |                                               | 0.91      | % |                           |   | 0.54      | %                           |  |   | 0.78      | % |  |   | 0.94      | % |  |   | 1.48      | %
|Continuing                                            |  |                                               | 0.91      | % |                           |   | 0.72      | %                           |  |   | 0.78      | % |  |   | 0.93      | % |  |   | 0.86      | %
|Net interest margin                                   |  |                                               | 4.55      | % |                           |   | 4.71      | %                           |  |   | 4.56      | % |  |   | 4.80      | % |  |   | 4.68      | %
|Efficiency ratio                                      |  |                                               | 69.77     | % |                           |   | 64.23     | %                           |  |   | 70.95     | % |  |   | 62.03     | % |  |   | 64.96     | %
|Full-time equivalent employees                        |  |                                               | 1024      |   |                           |   | 991       |                             |  |   | 1024      |   |  |   | 991       |   |  |   | 1036      |  
|Number of banking offices                             |  |                                               | 37        |   |                           |   | 35        |                             |  |   | 37        |   |  |   | 37        |   |  |   | 37        |  



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|                                                                                                           |  |                             |   |  |                           |   |  |                              |   |  |        |   |  |       |  
|---------------------------------------------------------------------------------------------------------- |  | --------------------------- | - |  | ------------------------- | - |  | ---------------------------- | - |  | ------ | - |  | ----- | -
|                                                                                                           |  | Three Months Ended June 30, |   |  | Six Months Ended June 30, |   |  | Year Ended December 31, 2003 |  
|                                                                                                           |  | 2004                        |   |  | 2003                      |   |  | 2004                         |   |  | 2003   |   | 
|LIQUIDITY AND CAPITAL RATIOS:                                                                              |  |                             |   |  |                           |   |  |                              |   |  |        |   |  |       |  
|Average loans to average deposits                                                                          |  | 87.56                       | % |  | 104.38                    | % |  | 87.45                        | % |  | 100.99 | % |  | 99.91 | %
|Period-end shareholders equity to total assets                                                            |  | 9.62                        | % |  | 7.59                      | % |  | 9.62                         | % |  | 7.59   | % |  | 9.13  | %
|Average shareholders equity to average assets                                                             |  | 9.61                        | % |  | 7.66                      | % |  | 9.47                         | % |  | 7.64   | % |  | 8.17  | %
|Period-end tangible capital to total tangible assets                                                       |  | 7.69                        | % |  | 6.16                      | % |  | 7.69                         | % |  | 6.16   | % |  | 7.24  | %
|Tier 1 capital to risk-weighted assets                                                                     |  | 12.58                       | % |  | 10.34                     | % |  | 12.58                        | % |  | 10.34  | % |  | 12.30 | %
|Total capital to risk-weighted assets                                                                      |  | 15.47                       | % |  | 13.33                     | % |  | 15.47                        | % |  | 13.33  | % |  | 15.40 | %
|Tier 1 leverage ratio (Tier 1 capital to total average assets)                                             |  | 10.31                       | % |  | 8.38                      | % |  | 10.31                        | % |  | 8.38   | % |  | 10.38 | %
|                                                                                                           |  |                             |   |  |                          
|ASSET QUALITY RATIOS:                                                                                      |  |                             |   |  |                           |   |  |                              |   |  |        |   |  |       |  
|Period-end allowance for credit losses to period-end loans                                                 |  | 1.26                        | % |  | 1.19                      | % |  | 1.26                         | % |  | 1.19   | % |  | 1.42  | %
|Net charge-offs to average loans (2)                                                                       |  | 0.38                        | % |  | 0.45                      | % |  | 0.90                         | % |  | 0.46   | % |  | 0.60  | %
|Period-end allowance for credit losses to nonperforming loans                                              |  | 252.91                      | % |  | 157.17                    | % |  | 252.91                       | % |  | 157.17 | % |  | 90.66 | %
|Nonperforming assets to period-end loans, real estate acquired by foreclosure and other repossessed assets |  | 0.63                        | % |  | 0.94                      | % |  | 0.63                         | % |  | 0.94   | % |  | 1.68  | %
|Nonperforming loans to period-end loans                                                                    |  | 0.50                        | % |  | 0.76                      | % |  | 0.50                         | % |  | 0.76   | % |  | 1.57  | %
|Nonperforming assets to period-end assets                                                                  |  | 0.44                        | % |  | 0.72                      | % |  | 0.44                         | % |  | 0.72   | % |  | 1.13  | %

---

|(1) | Earnings per share in each quarter from continuing operations, discontinued operations and net income is computed individually using the weighted-average number of shares
outstanding during that quarter while earnings per share for the full period is computed using the weighted-average number of shares outstanding during the year. Thus, the sum for the quarters and net income from continuing and discontinued
operations earnings per share does not necessarily equal the full period and net income earnings per share. The calculation of diluted EPS excludes 323,283 and 256,038 options for the three and six months ended June 30, 2004, 581,213 options for
both the three and six months ended June 30, 2003 and 620,431 for December 31, 2003 which were antidilutive.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



RESULTS OF OPERATIONS



Net Income
- Net income for the three months ended June 30, 2004 increased $2.4 million or 52.4%, over the comparable period in 2003. The increase was primarily the result of a $3.2 million after-tax gain on the securitization and sale of certain
interest-only securities offset by after-tax losses of $554 thousand for the sale of U.S. Treasury securities and impairment charges on certain bank properties of $721 thousand, net of taxes. The remaining increase is primarily due to a decrease in
the provision for credit losses, partially offset by lower net interest income. Net income for the second quarter of 2003 included after-tax losses from discontinued operations of $1.6 million, or $0.03 per diluted share.



Net income for the six months ended June 30, 2004 decreased $3.6 million or 22.5% as compared
with the same period of 2003. In addition to the other items discussed above, this decrease was primarily the result of lower net interest income offset by a decrease in the provision for credit losses.



Net Interest Income - Net interest income for the three and six months ended
June 30, 2004 decreased $3.4 million or 9.5% and $5.9 million or 8.3% compared with the same periods in 2003, respectively. These decreases were primarily caused by a decline in both average earning assets and the net interest margin.



Average interest-earning assets for the three and six-month period ended June 30, 2004
decreased $186.1 million or 6.11% and $115.8 million or 3.9% over the comparable periods in 2003, respectively.



On September 30, 2003, we completed the sale of our mortgage-banking operations. Sterling Bank lost the benefit of the mortgage warehouse it financed for the
mortgage-banking operation shortly after completing the sale when the buyer decided to pay off this credit facility. Average interest-earning assets for the three and six month periods ended June 30, 2003 included $610.9 million and $560.4 million,
respectively, related to this mortgage warehouse credit facility.



In the
fourth quarter of 2003, we increased the size of the investment portfolio for balance sheet liquidity purposes and to replace a portion of the earning assets of the mortgage operation. On average, the securities portfolio for the three and six month
periods ended June 30, 2004 was higher by $276.7 million and $263.5 million, respectively, as compared with the same periods in 2003. Overall, the average yields on these securities are less than the yield previously earned on the mortgage warehouse
credit facility.



Our net interest margin for the three-month period ended June
30, 2004 was 4.55% compared to 4.71% for the same period in 2003, a decrease of 16 basis points. For the six-month period ended June 30, 2004, our net interest margin was 4.56% compared to 4.80% for the same period in 2003. These decreases are due
to the payoff of the higher yielding mortgage warehouse credit facility and declines



20



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in market interest rates of the past few years. On June 30, 2004, the Federal Open Market Committee increased the
overnight interest rate by 25 basis points. This was the first rate increase in more than four years. We expect this rate increase to help further stabilize our net interest margin.



Average interest-bearing liabilities for the three and six month periods ended June 30, 2004 decreased $194.8 million or 8.9% and $148.4
million or 6.9%, respectively, from the same periods in 2003. The average balance of other borrowed funds and notes payable decreased $278.3 million and $225.9 million for the three and six month periods ended June 30, 2004, respectively, as
compared to the same periods in 2003. We repaid certain borrowings and notes payable after the sale of our mortgage-banking operations.



21



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Certain average balances, together with the total dollar amounts of interest income and expense and the average interest
rates, were as follows (dollars in thousands):



|                                               |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|---------------------------------------------- |  | --------------------------- | --------- | - | -------- | - | ----------------- |  | ---- | -------------- |  | - | --------- | - | ----------------- | - | ------ |  | ---- | -
|                                               |  | Three Months Ended June 30, |          
|                                               |  | 2004                        |           |   | 2003     |  
|                                               |  | AverageBalance              |           |   | Interest |   | AverageYield/Rate |  |      | AverageBalance |  |   | Interest  |   | AverageYield/Rate |  
|Interest-earning assets:                       |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Loans held for sale (1)                        |  | $                           | 11,568    |   |          | $ | 187               |  | 6.50 | %              |  | $ | 617,822   |   |                   | $ | 8,462  |  | 5.49 | %
|Loans held for investment (1):                 |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Taxable                                        |  |                             | 2,144,582 |   |          |   | 32,771            |  | 6.15 | %              |  |   | 2,002,939 |   |                   |   | 32,637 |  | 6.54 | %
|Non-taxable                                    |  |                             | 4,064     |   |          |   | 65                |  | 6.43 | %              |  |   | 4,545     |   |                   |   | 73     |  | 6.44 | %
|Securities:                                    |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Taxable                                        |  |                             | 529,652   |   |          |   | 4,977             |  | 3.78 | %              |  |   | 240,922   |   |                   |   | 2,201  |  | 3.66 | %
|Non-taxable                                    |  |                             | 42,817    |   |          |   | 464               |  | 4.36 | %              |  |   | 54,889    |   |                   |   | 595    |  | 4.35 | %
|Trading assets                                 |  |                             | 113,392   |   |          |   | 991               |  | 3.52 | %              |  |   | 107,383   |   |                   |   | 871    |  | 3.25 | %
|Federal funds sold                             |  |                             | 9,709     |   |          |   | 23                |  | 0.94 | %              |  |   | 13,958    |   |                   |   | 39     |  | 1.12 | %
|Deposits in financial institutions             |  |                             | 1,874     |   |          |   | 16                |  | 3.39 | %              |  |   | 1,291     |   |                   |   | 17     |  | 5.28 | %
|                                               |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total interest-earning assets                  |  |                             | 2,857,658 |   |          |   | 39,494            |  | 5.56 | %              |  |   | 3,043,749 |   |                   |   | 44,895 |  | 5.92 | %
|                                               |  |                             |           |   |          |  
|Noninterest-earning assets:                    |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Cash and due from banks                        |  |                             | 98,580    |   |          |   |                   |  |      |                |  |   | 95,346    |   |                   |   |        |  |      |  
|Premises and equipment, net                    |  |                             | 47,744    |   |          |   |                   |  |      |                |  |   | 47,951    |   |                   |   |        |  |      |  
|Other assets                                   |  |                             | 157,619   |   |          |   |                   |  |      |                |  |   | 232,104   |   |                   |   |        |  |      |  
|Allowance for credit losses                    |  |                             | (27,095   | ) |          |   |                   |  |      |                |  |   | (29,250   | ) |                   |   |        |  |      |  
|Assets related to discontinued operations      |  |                             |          |   |          |   |                   |  |      |                |  |   | 53,190    |   |                   |   |        |  |      |  
|                                               |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total noninterest-earning assets               |  |                             | 276,848   |   |          |   |                   |  |      |                |  |   | 399,341   |   |                   |   |        |  |      |  
|                                               |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total assets                                   |  | $                           | 3,134,506 |   |          |   |                   |  |      |                |  | $ | 3,443,090 |   |                   |   |        |  |      |  
|                                               |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Interest-bearing liabilities:                  |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Deposits:                                      |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Demand and savings                             |  | $                           | 934,732   |   |          | $ | 1,080             |  | 0.46 | %              |  | $ | 886,105   |   |                   | $ | 1,288  |  | 0.58 | %
|Certificates and other time                    |  |                             | 713,283   |   |          |   | 3,275             |  | 1.85 | %              |  |   | 679,685   |   |                   |   | 3,827  |  | 2.26 | %
|Other borrowed funds                           |  |                             | 212,123   |   |          |   | 586               |  | 1.11 | %              |  |   | 470,633   |   |                   |   | 1,578  |  | 1.34 | %
|Notes payable                                  |  |                             |          |   |          |   |                  |  |     |                |  |   | 19,792    |   |                   |   | 155    |  | 3.14 | %
|Subordinated debt                              |  |                             | 46,298    |   |          |   | 620               |  | 5.39 | %              |  |   | 44,994    |   |                   |   | 716    |  | 6.38 | %
|Junior subordinated debt                       |  |                             | 82,475    |   |          |   | 1,587             |  | 7.74 | %              |  |   | 82,475    |   |                   |   | 1,597  |  | 7.77 | %
|                                               |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total interest-bearing liabilities             |  |                             | 1,988,911 |   |          |   | 7,148             |  | 1.45 | %              |  |   | 2,183,684 |   |                   |   | 9,161  |  | 1.68 | %
|                                               |  |                             |           |   |          |  
|Noninterest-bearing liabilities:               |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Demand deposits                                |  |                             | 819,188   |   |          |   |                   |  |      |                |  |   | 949,373   |   |                   |   |        |  |      |  
|Other liabilities                              |  |                             | 25,206    |   |          |   |                   |  |      |                |  |   | 13,085    |   |                   |   |        |  |      |  
|Liabilities related to discontinued operations |  |                             |          |   |          |   |                   |  |      |                |  |   | 33,200    |   |                   |   |        |  |      |  
|                                               |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total noninterest-bearing liabilities          |  |                             | 844,394   |   |          |   |                   |  |      |                |  |   | 995,658   |   |                   |   |        |  |      |  
|                                               |  |                             |           |   |          |  
|Shareholders equity                           |  |                             | 301,201   |   |          |   |                   |  |      |                |  |   | 263,748   |   |                   |   |        |  |      |  
|                                               |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total liabilities and shareholders equity     |  | $                           | 3,134,506 |   |          |   |                   |  |      |                |  | $ | 3,443,090 |   |                   |   |        |  |      |  
|                                               |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Net interest income & margin                   |  |                             |           |   |          | $ | 32,346            |  | 4.55 | %              |  |   |           |   |                   | $ | 35,734 |  | 4.71 | %
|                                               |  |                             |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  

---

|(1) | Loan origination fees are reported together with interest income on loans. These fees aggregated $1.3 million for both the quarter ended June 30, 2004 and 2003. Related loan
origination costs are not separately allocated to loans, but are charged to non-interest expense. For the purpose of calculating loan yields, average loan balances included nonaccrual loans with no related interest income.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|                                               |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|---------------------------------------------- |  | ------------------------- | --------- | - | -------- | - | ----------------- |  | ---- | -------------- |  | - | --------- | - | ----------------- | - | ------ |  | ---- | -
|                                               |  | Six Months Ended June 30, |          
|                                               |  | 2004                      |           |   | 2003     |  
|                                               |  | AverageBalance            |           |   | Interest |   | AverageYield/Rate |  |      | AverageBalance |  |   | Interest  |   | AverageYield/Rate |  
|Interest-earning assets:                       |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Loans held for sale (1)                        |  | $                         | 10,389    |   |          | $ | 315               |  | 6.10 | %              |  | $ | 567,100   |   |                   | $ | 15,604 |  | 5.55 | %
|Loans held for investment (1):                 |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Taxable                                        |  |                           | 2,143,833 |   |          |   | 65,810            |  | 6.17 | %              |  |   | 1,985,866 |   |                   |   | 65,439 |  | 6.65 | %
|Non-taxable                                    |  |                           | 4,126     |   |          |   | 132               |  | 6.43 | %              |  |   | 4,743     |   |                   |   | 153    |  | 6.51 | %
|Securities:                                    |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Taxable                                        |  |                           | 528,857   |   |          |   | 9,997             |  | 3.80 | %              |  |   | 250,865   |   |                   |   | 4,925  |  | 3.96 | %
|Non-taxable                                    |  |                           | 42,157    |   |          |   | 919               |  | 4.38 | %              |  |   | 56,601    |   |                   |   | 1,244  |  | 4.43 | %
|Trading assets                                 |  |                           | 138,600   |   |          |   | 2,453             |  | 3.56 | %              |  |   | 114,244   |   |                   |   | 1,733  |  | 3.06 | %
|Federal funds sold                             |  |                           | 10,312    |   |          |   | 43                |  | 0.84 | %              |  |   | 15,119    |   |                   |   | 86     |  | 1.15 | %
|Deposits in financial institutions             |  |                           | 1,677     |   |          |   | 31                |  | 3.69 | %              |  |   | 1,220     |   |                   |   | 36     |  | 5.95 | %
|                                               |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total interest-earning assets                  |  |                           | 2,879,951 |   |          |   | 79,700            |  | 5.57 | %              |  |   | 2,995,758 |   |                   |   | 89,220 |  | 6.01 | %
|                                               |  |                           |           |   |          |  
|Noninterest-earning assets:                    |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Cash and due from banks                        |  |                           | 101,779   |   |          |   |                   |  |      |                |  |   | 98,825    |   |                   |   |        |  |      |  
|Premises and equipment, net                    |  |                           | 48,299    |   |          |   |                   |  |      |                |  |   | 49,423    |   |                   |   |        |  |      |  
|Other assets                                   |  |                           | 157,139   |   |          |   |                   |  |      |                |  |   | 232,715   |   |                   |   |        |  |      |  
|Allowance for credit losses                    |  |                           | (29,325   | ) |          |   |                   |  |      |                |  |   | (28,756   | ) |                   |   |        |  |      |  
|Assets related to discontinued operations      |  |                           |          |   |          |   |                   |  |      |                |  |   | 53,149    |   |                   |   |        |  |      |  
|                                               |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total noninterest-earning assets               |  |                           | 277,892   |   |          |   |                   |  |      |                |  |   | 405,356   |   |                   |   |        |  |      |  
|                                               |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total assets                                   |  | $                         | 3,157,843 |   |          |   |                   |  |      |                |  | $ | 3,401,114 |   |                   |   |        |  |      |  
|                                               |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Interest-bearing liabilities:                  |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Deposits:                                      |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Demand and savings                             |  | $                         | 937,869   |   |          | $ | 2,033             |  | 0.44 | %              |  | $ | 903,730   |   |                   | $ | 2,749  |  | 0.61 | %
|Certificates and other time                    |  |                           | 716,452   |   |          |   | 6,640             |  | 1.86 | %              |  |   | 697,182   |   |                   |   | 8,053  |  | 2.33 | %
|Other borrowed funds                           |  |                           | 229,958   |   |          |   | 1,267             |  | 1.11 | %              |  |   | 435,603   |   |                   |   | 2,926  |  | 1.35 | %
|Notes payable                                  |  |                           |          |   |          |   |                  |  |     |                |  |   | 20,252    |   |                   |   | 320    |  | 3.19 | %
|Subordinated debt                              |  |                           | 46,705    |   |          |   | 1,215             |  | 5.23 | %              |  |   | 22,621    |   |                   |   | 716    |  | 6.38 | %
|Junior subordinated debt                       |  |                           | 82,475    |   |          |   | 3,178             |  | 7.75 | %              |  |   | 82,475    |   |                   |   | 3,197  |  | 7.82 | %
|                                               |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total interest-bearing liabilities             |  |                           | 2,013,459 |   |          |   | 14,333            |  | 1.43 | %              |  |   | 2,161,863 |   |                   |   | 17,961 |  | 1.68 | %
|                                               |  |                           |           |   |          |  
|Noninterest-bearing liabilities:               |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Demand deposits                                |  |                           | 813,649   |   |          |   |                   |  |      |                |  |   | 931,769   |   |                   |   |        |  |      |  
|Other liabilities                              |  |                           | 31,609    |   |          |   |                   |  |      |                |  |   | 13,483    |   |                   |   |        |  |      |  
|Liabilities related to discontinued operations |  |                           |          |   |          |   |                   |  |      |                |  |   | 34,231    |   |                   |   |        |  |      |  
|                                               |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total noninterest-bearing liabilities          |  |                           | 845,257   |   |          |   |                   |  |      |                |  |   | 979,483   |   |                   |   |        |  |      |  
|                                               |  |                           |           |   |          |  
|Shareholders equity                           |  |                           | 299,127   |   |          |   |                   |  |      |                |  |   | 259,768   |   |                   |   |        |  |      |  
|                                               |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total liabilities and shareholders equity     |  | $                         | 3,157,843 |   |          |   |                   |  |      |                |  | $ | 3,401,114 |   |                   |   |        |  |      |  
|                                               |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Net interest income & margin                   |  |                           |           |   |          | $ | 65,367            |  | 4.56 | %              |  |   |           |   |                   | $ | 71,259 |  | 4.80 | %
|                                               |  |                           |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  

---

|(1) | Loan origination fees are reported together with interest income on loans. These fees aggregated $2.5 million and $2.7 million for the periods ended June 30, 2004 and 2003,
respectively. Related loan origination costs are not separately allocated to loans, but are charged to non-interest expense. For the purpose of calculating loan yields, average loan balances included nonaccrual loans with no related interest income.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23



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##### Table of Contents

Noninterest Income - Noninterest income for the three and six months ended June 30, 2004 and 2003,
respectively, is summarized as follows (in thousands):



|                                               |  |                            |        |               |                          |       |               |  |               |        |  |   |       
|---------------------------------------------- |  | -------------------------- | ------ | ------------- | ------------------------ | ----- | ------------- |  | ------------- | ------ |  | - | ------
|                                               |  | For the Three Months Ended |        |               | For the Six Months Ended
|                                               |  | June 30, 2004              |        | June 30, 2003 |                          |       | June 30, 2004 |  | June 30, 2003
|Customer service fees                          |  | $                          | 3,688  |               | $                        | 3,986 |               |  | $             | 7,609  |  | $ | 8,300 
|Net gain on the sale of trading assets         |  |                            | 154    |               |                          | 280   |               |  |               | 502    |  |   | 627   
|Net gain on the sale of securities             |  |                            | 4,128  |               |                          |      |               |  |               | 4,271  |  |   | 374   
|Net gain (loss) on the sale of banking offices |  |                            |       |               |                          | (142  | )             |  |               |       |  |   | 3,240 
|Bank owned life insurance                      |  |                            | 472    |               |                          | 507   |               |  |               | 945    |  |   | 1,012 
|Debit card income                              |  |                            | 408    |               |                          | 412   |               |  |               | 765    |  |   | 785   
|Other                                          |  |                            | 1,927  |               |                          | 2,044 |               |  |               | 3,902  |  |   | 4,025 
|                                               |  |                            |        |               |                          |       |               |  |               |        |  |   |       
|                                               |  | $                          | 10,777 |               | $                        | 7,087 |               |  | $             | 17,994 |  | $ | 18,363
|                                               |  |                            |        |               |                          |       |               |  |               |        |  |   |       



The increase of $3.7 million for the
three-month period ended June 30, 2004 as compared with same period of 2003, was due principally to the securitization and sale of certain interest-only securities for a pre-tax gain of $4.9 million reflected in the net gain on the sale of
securities. These securities were part of our capital markets activities. This gain was partially offset by a loss of $853 thousand for the sale of lower yielding U.S. Treasury securities.



Noninterest income for the six-month period ended June 30, 2004 was down slightly compared to
the same period for 2003. A net gain on the sale of four banking offices of $3.2 million increased noninterest income for the six month period ended June 30, 2003. Customer service fees have declined primarily due to the sale of these banking
offices in 2003. These rural offices had a more retail customer base and their location and growth potential did not align with our business banking strategy.



Noninterest Expense - Noninterest expense for the three and six months ended June 30, 2004 and 2003, respectively, is summarized as follows (in
thousands):



|                                                                                   |  |                            |        |   |                          |   |        |               |  |               |        |  |   |        |  
|---------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ------------- |  | ------------- | ------ |  | - | ------ | -
|                                                                                   |  | For the Three Months Ended |        |   | For the Six Months Ended |  
|                                                                                   |  | June 30, 2004              |        |   | June 30, 2003            |   |        | June 30, 2004 |  | June 30, 2003 |       
|Salaries and employee benefits                                                     |  | $                          | 17,175 |   |                          | $ | 16,082 |               |  | $             | 34,862 |  | $ | 33,333 |  
|Occupancy expense                                                                  |  |                            | 3,743  |   |                          |   | 3,960  |               |  |               | 7,340  |  |   | 7,712  |  
|Technology                                                                         |  |                            | 1,537  |   |                          |   | 1,229  |               |  |               | 2,925  |  |   | 2,429  |  
|Professional fees                                                                  |  |                            | 1,395  |   |                          |   | 1,289  |               |  |               | 2,457  |  |   | 1,983  |  
|Postage, delivery and supplies                                                     |  |                            | 816    |   |                          |   | 854    |               |  |               | 1,691  |  |   | 1,805  |  
|Marketing                                                                          |  |                            | 539    |   |                          |   | 480    |               |  |               | 925    |  |   | 885    |  
|Core deposit intangible amortization                                               |  |                            | 124    |   |                          |   | 114    |               |  |               | 248    |  |   | 228    |  
|Net losses (gains) and carrying costs of other real estate and foreclosed property |  |                            | (17    | ) |                          |   | (205   | )             |  |               | 2      |  |   | (211   | )
|Other                                                                              |  |                            | 4,773  |   |                          |   | 3,701  |               |  |               | 8,697  |  |   | 7,431  |  
|                                                                                   |  |                            |        |   |                          |   |        |               |  |               |        |  |   |        |  
|                                                                                   |  | $                          | 30,085 |   |                          | $ | 27,504 |               |  | $             | 59,147 |  | $ | 55,595 |  
|                                                                                   |  |                            |        |   |                          |   |        |               |  |               |        |  |   |        |  



Salaries and employee benefits for the
three and six month periods ended June 30, 2004 increased $1.1 million or 6.8% and $1.5 million or 4.6%, compared to the same periods in 2003. The increases were primarily related to annual merit increases, incentive compensation and increases in
staffing levels. We had 1,024 full-time equivalent employees at June 30, 2004 compared with 991 at June 30, 2003.



Technology expense increased $308 thousand or 25.1% and $496 thousand or 20.4% for the three and six month periods ended June 30, 2004 over the comparable periods in
2003. The increases were due primarily to upgrading costs on the banks computer systems.



Professional fees increased $106 thousand or 8.2% and $474 thousand or 23.9% for the three and six month periods ended June 30, 2004, as compared to the same periods in 2003. The increases were primarily the result of
higher legal fees and consulting fees incurred in connection with our compliance with the Sarbanes-Oxley Act of 2002.



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Other non-interest expense increased $1.1 million or 29.0% and $1.3 million or 17.0% for the three and six month periods
ended June 30, 2004 compared to the same periods in 2003. This increase was due, in part, to an impairment charge of $1.1 million in the second quarter of 2004 on one bank office building and one tract of unused land which we intend to sell.



Income Taxes  The Company recognized federal and state
income tax expense on continuing operations for the three and six months ended June 30, 2004 of $3.2 million and $5.6 million, for effective rates of 31.0% and 31.4%, compared to $3.0 million and $7.7 million, for effective rates of 32.8% and 33.0%,
for the three and six months ended June 30, 2003. The effective income tax rates differed from the federal statutory rate of 35% during the comparable periods primarily because of the effect of non-taxable interest income and life insurance
policies.



FINANCIAL CONDITION



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



|                                |  |               |           |   |                   |   |        |   |           |  |       |  
|------------------------------- |  | ------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                |  | June 30, 2004 |           |   | December 31, 2003 |  
|                                |  | Amount        |           | % |                   |   | Amount |   | %         | 
|Commercial and industrial       |  | $             | 605,125   |   | 28.1              | % |        | $ | 658,881   |  | 30.9  | %
|Real estate:                    |  |               |           |   |                   |   |        |   |           |  |       |  
|Commercial                      |  |               | 921,663   |   | 42.8              | % |        |   | 829,199   |  | 38.9  | %
|Construction and development    |  |               | 326,112   |   | 15.1              | % |        |   | 327,295   |  | 15.4  | %
|Residential mortgage            |  |               | 191,121   |   | 8.9               | % |        |   | 201,948   |  | 9.5   | %
|Foreign loans                   |  |               | 10,672    |   | 0.5               | % |        |   | 8,464     |  | 0.4   | %
|Consumer, net                   |  |               | 98,896    |   | 4.6               | % |        |   | 104,944   |  | 4.9   | %
|                                |  |               |           |   |                   |   |        |   |           |  |       |  
|Total loans held for investment |  | $             | 2,153,589 |   | 100.0             | % |        | $ | 2,130,731 |  | 100.0 | %
|                                |  |               |           |   |                   |   |        |   |           |  |       |  



At June 30, 2004, loans held for
investment were $2.2 billion, an increase of $22.9 million or 1.1% over loans held for investment at December 31, 2003. The increase was primarily related to growth in the commercial real estate loan category. The Company has experienced higher than
expected loan prepayment activity during 2004. This along with our internal efforts to improve asset quality has limited loan growth. During the first quarter of 2004, we sold $10.7 million of non-performing loans.



At June 30, 2004, loans held for investment were 86.5% of deposits and 69.7% of total assets.
As of June 30, 2004, we had no material concentrations of loans or material foreign loans outstanding.



Loans Held for Sale - Loans held for sale were $13.9 million at June 30, 2004, as compared with $26.3 million at December 31, 2003. Loans held for sale at June 30, 2004 consisted primarily of the
guaranteed portion of SBA loans we originated. Due to the timing of the sales of these loans to investors, the balance of loans in the held for sale category at any given time may be somewhat volatile.



Trading Assets  Trading assets were $92.8 million at June 30, 2004, as
compared with $172.8 million at December 31, 2003, a decrease of $80.1 million or 46.3%. These assets consist primarily of the government guaranteed portion of SBA loans. Trading assets are purchased with the anticipation of sale in the near term
and are carried at market value. The size of this portfolio is dependent upon the current market conditions for SBA loans.



Securities - The Companys securities portfolio at June 30, 2004 totaled $519.2 million, as compared to $565.1 million at December 31, 2003, a decrease
of $45.9 million or 8.1%. The decrease was due, in part, to the securitization and sale of certain-interest only securities in April 2004. Additionally, we sold our holdings of lower yielding U.S. Treasury securities in June 2004. Net unrealized
losses on the available-for-sale securities were $6.3 million at June 30, 2004 as compared to net unrealized gains of $1.7 million at December 31, 2003. Unrealized losses are primarily attributable to increases in market interest rates since the
underlying securities were purchased.



25



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##### Table of Contents

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



|                                     |  |               |           |   |                   |   |        |   |           |  |       |  
|------------------------------------ |  | ------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                     |  | June 30, 2004 |           |   | December 31, 2003 |  
|                                     |  | Amount        |           | % |                   |   | Amount |   | %         | 
|Noninterest-bearing demand           |  | $             | 845,874   |   | 34.0              | % |        | $ | 834,313   |  | 34.5  | %
|Interest-bearing demand              |  |               | 977,943   |   | 39.3              | % |        |   | 929,577   |  | 38.4  | %
|Certificates and other time deposits |  |               |           |   |                   |   |        |   |           |  |       |  
|Jumbo                                |  |               | 341,691   |   | 13.7              | % |        |   | 386,914   |  | 16.0  | %
|Regular                              |  |               | 205,838   |   | 8.3               | % |        |   | 212,799   |  | 8.8   | %
|Brokered deposits                    |  |               | 117,259   |   | 4.7               | % |        |   | 54,766    |  | 2.3   | %
|                                     |  |               |           |   |                   |   |        |   |           |  |       |  
|Total deposits                       |  | $             | 2,488,605 |   | 100.0             | % |        | $ | 2,418,369 |  | 100.0 | %
|                                     |  |               |           |   |                   |   |        |   |           |  |       |  



Total deposits as of June 30, 2004
were $2.5 billion as compared to $2.4 billion at December 31, 2003, an increase of $70.2 million. Brokered certificates of deposit were $117.3 million and $54.8 million at June 30, 2004 and December 31, 2003, respectively. The percentage of
noninterest bearing deposits to total deposits as of June 30, 2004 was 34.0%.



Other Borrowed Funds  As of June 30, 2004, we had $149.8 million in other borrowed funds compared to $324.2 million at December 31, 2003, a decrease of $174.4 million or 53.8%. Other borrowed funds are used to fund a
portion of our lending activities. We also utilize these borrowings to meet liquidity needs. Generally, these borrowings have maturities of less than 30 days and are replaced at maturity with either additional borrowings or through increased
customer deposits.



ASSET QUALITY



Risk Elements Nonperforming assets includes restructured loans,
nonaccrual loans, real estate acquired by foreclosure and other repossessed assets. Nonperforming and past-due 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.



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



|                                                                                                           |  |              |        |   |                   |   |        |  
|---------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | - | ----------------- | - | ------ | -
|                                                                                                           |  | June 30,2004 |        |   | December 31, 2003 |  
|Nonperforming loans - nonaccrual                                                                           |  | $            | 10,806 |   |                   | $ | 33,887 |  
|Real estate acquired by foreclosure                                                                        |  |              | 2,608  |   |                   |   | 2,124  |  
|Other repossessed assets                                                                                   |  |              | 273    |   |                   |   | 169    |  
|                                                                                                           |  |              |        |   |                   |   |        |  
|Total nonperforming assets                                                                                 |  | $            | 13,687 |   |                   | $ | 36,180 |  
|                                                                                                           |  |              |        |   |                   |   |        |  
|Potential problem loans                                                                                    |  | $            | 62,638 |   |                   | $ | 66,482 |  
|                                                                                                           |  |              |        |   |                   |   |        |  
|Accruing loans past due 90 days or more                                                                    |  | $            | 3,987  |   |                   | $ | 35     |  
|                                                                                                           |  |              |        |   |                   |   |        |  
|Period-end allowance for credit losses to nonperforming loans                                              |  |              | 252.91 | % |                   |   | 90.66  | %
|Nonperforming assets to period-end loans, real estate acquired by foreclosure and other repossessed assets |  |              | 0.63   | % |                   |   | 1.68   | %
|Nonperforming loans to period-end loans                                                                    |  |              | 0.50   | % |                   |   | 1.57   | %
|Nonperforming assets to period-end assets                                                                  |  |              | 0.44   | % |                   |   | 1.13   | %



At June 30, 2004, we had $13.7 million
in nonperforming assets, a decrease of 62.2% from $36.2 million at December 31, 2003. During the first quarter of 2004, we sold $10.7 million of nonperforming loans which resulted in an increase in charge-offs of $4.6 million. The Company had
provided for the losses on these nonperforming loans during previous periods and decided to sell these loans to minimize its loss exposure.



Separately, we had three large nonperforming relationships at December 31, 2003 that were placed on nonaccrual status during the second half of 2003. These relationships
individually were larger than $3 million. Two of these nonperforming relationships were returned to performing status during the first half of year 2004. The third of these relationships was partially charged-off and the remainder was on
nonperforming status at June 30, 2004.



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Accruing loans past due 90 days or more at June 30, 2004 consisted primarily of one relationship totaling $3.9 million.
This relationship is expected to be renewed.



Allowance for Credit
Losses - The provision for credit losses for the three and six months ended June 30, 2004 was $2.8 million and $6.3 million as compared to $6.1 million and $10.5 million for the same periods in 2003. The decreases in the provision for credit
losses were due to improvements in asset quality.



Net charge-offs were $2.1
million and $9.7 million or 0.38% and 0.9% (annualized) of average loans for the three and six month periods ended June 30, 2004. As discussed above, the nonperforming loan sale completed in the first quarter of 2004 resulted in an increase in
charge-offs of $4.6 million.



Overall, the allowance for credit losses at June
30, 2004 was $27.3 million and represented 1.26% of total loans. The allowance for credit losses at June 30, 2004 was 252.9% of nonperforming loans, up favorably from 90.7% at December 31, 2003, principally because of the improvements in asset
quality.



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



|                                                           |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                           |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|                                                           |  | 2004                        |        |   | 2003                      |   |        | 2004 |  |   | 2003   |  
|Allowance for credit losses at beginning of period         |  | $                           | 26,609 |   |                           | $ | 28,429 |      |  | $ | 30,722 |   |  | $ | 27,248 |  
|Charge-offs:                                               |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Commercial, financial, and industrial                      |  |                             | 1,906  |   |                           |   | 1,905  |      |  |   | 7,480  |   |  |   | 3,801  |  
|Real estate, mortgage and construction                     |  |                             | 719    |   |                           |   | 1,468  |      |  |   | 3,014  |   |  |   | 2,334  |  
|Consumer                                                   |  |                             | 218    |   |                           |   | 222    |      |  |   | 717    |   |  |   | 658    |  
|                                                           |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Total charge-offs                                          |  |                             | 2,843  |   |                           |   | 3,595  |      |  |   | 11,211 |   |  |   | 6,793  |  
|                                                           |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Recoveries                                                 |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Commercial, financial, and industrial                      |  |                             | 732    |   |                           |   | 507    |      |  |   | 1,318  |   |  |   | 632    |  
|Real estate, mortgage and construction                     |  |                             | 9      |   |                           |   | 53     |      |  |   | 100    |   |  |   | 142    |  
|Consumer                                                   |  |                             | 41     |   |                           |   | 82     |      |  |   | 119    |   |  |   | 150    |  
|                                                           |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Total recoveries                                           |  |                             | 782    |   |                           |   | 642    |      |  |   | 1,537  |   |  |   | 924    |  
|                                                           |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Net charge-offs                                            |  |                             | 2,061  |   |                           |   | 2,953  |      |  |   | 9,674  |   |  |   | 5,869  |  
|Allowance sold with divestiture                            |  |                             |        |   |                           |   |       |      |  |   |        |   |  |   | 353    |  
|Provision for credit losses                                |  |                             | 2,781  |   |                           |   | 6,098  |      |  |   | 6,281  |   |  |   | 10,548 |  
|                                                           |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Allowance for credit losses at end of period               |  | $                           | 27,329 |   |                           | $ | 31,574 |      |  | $ | 27,329 |   |  | $ | 31,574 |  
|                                                           |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Period-end allowance for credit losses to period-end loans |  |                             | 1.26   | % |                           |   | 1.19   | %    |  |   | 1.26   | % |  |   | 1.19   | %
|Net charge-offs to average loans (annualized)              |  |                             | 0.38   | % |                           |   | 0.45   | %    |  |   | 0.90   | % |  |   | 0.46   | %



INTEREST RATE SENSITIVITY



We manage interest rate risk by positioning the balance sheet to maximize
net interest income while maintaining an acceptable level of risk to changes in market interest rates. This process requires a balance between profitability, liquidity, and interest rate risk.



To effectively measure and manage interest rate risk, the Company uses simulation analysis to
determine the impact on net interest income of changes in interest rates under various interest rate scenarios, balance sheet trends, and strategies. From these simulations, interest rate risk is quantified and appropriate strategies are developed
and implemented. The overall interest rate risk position and strategies are reviewed by senior management, the Asset/Liability Management Committee and our Board of Directors on an ongoing basis.



An interest rate sensitive asset or liability is one that experiences a measurable change in
value as a direct result of changes in market interest rates. Interest rate risk is measured by analyzing the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time
(GAP) and by analyzing the effects of interest rate changes on net interest



27



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income over specific periods of time by projecting the performance of the mix of assets and liabilities in varied
interest rate environments. Interest rate sensitivity reflects the potential effect on net interest income of a movement in interest rates. A bank is considered asset sensitive, or having a positive GAP, when the amount of its interest-earning
assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, a bank is considered liability sensitive, or having a negative GAP, when the
amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-earning assets also maturing or repricing within that time period. During a period of rising interest rates, a negative GAP
would tend to adversely affect net interest income, while a positive GAP would tend to result in an increase in net interest income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest
income, while a positive GAP would tend to affect net interest income adversely. When analyzing its GAP position, the Company emphasizes the next twelve-month period.



We are positioned to benefit from rising rates because the Company has an asset sensitive position. Also, we would likely benefit from an
increase in short-term interest rates as this might signify that economic conditions are improving.



As mentioned, we utilize simulation models to estimate the impact on net interest income and present value of equity due to changes in interest rates under various scenarios. This analysis estimates a percentage of
change in these metrics from the stable rate base scenario versus alternative scenarios of rising and falling market interest rates by instantaneously shocking the balance sheet. The following table summarizes the simulated change over a 12-month
period as of June 30, 2004 and December 31, 2003 (dollars in thousands):



|                                         |                    |                        |   |                        |       |  
|---------------------------------------- | ------------------ | ---------------------- | - | ---------------------- | ----- | -
|Changes in Interest
Rates (Basis Points) |                    | Increase (Decrease) in |  
|                                         | Net InterestIncome |                        |   | Present Valueof Equity |      
|June 30, 2004                            |                    |                        |   |                        |       |  
|+200                                     |                    | 5.31                   | % |                        | -5.37 | %
|+100                                     |                    | 2.75                   | % |                        | -2.40 | %
|Base                                     |                    | 0.00                   | % |                        | 0.00  | %
|-100                                     |                    | -2.76                  | % |                        | 0.77  | %
|                                         |                    |                       
|December 31, 2003                        |                    |                        |   |                        |       |  
|+200                                     |                    | 6.03                   | % |                        | -7.00 | %
|+100                                     |                    | 3.14                   | % |                        | -2.72 | %
|Base                                     |                    | 0.00                   | % |                        | 0.00  | %
|-100                                     |                    | -3.80                  | % |                        | 0.62  | %



These sensitivities are all within the
thresholds set by our Asset/Liability Committee. Each rate scenario reflects unique prepayment and repricing assumptions. Since there are limitations inherent in any methodology used to estimate the exposure to changes in market interest rates, this
analysis is not intended to be a forecast of the actual effect of a change in market interest rates. The interest rate sensitivity analysis includes assumptions that (i) the composition of our interest sensitive assets and liabilities existing at
year end will remain constant over the measurement period; and (ii) that changes in market rates are parallel and instantaneous across the yield curve regardless of duration or repricing characteristics of specific assets or liabilities. Further,
the analysis does not contemplate any actions that we might undertake in response to changes in market interest rates. Accordingly, this analysis is not intended to and does not provide a precise forecast of the effect actual changes in market rates
will have on the Company.



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CAPITAL RESOURCES AND LIQUIDITY



Capital Resources - At June 30, 2004, shareholders equity totaled $297.3 million or 9.62% of total assets, as compared
to $292.6 million or 9.1% of total assets at December 31, 2003. Our risk-based capital ratios at June 30, 2004 remain above the levels designated by regulatory agencies for us to be considered as well capitalized. Our capital ratios at
June 30, 2004 were as follows (dollars in thousands):



|                                         |  |        |         |       |                                      |   |        |   |         |  |     |  
|---------------------------------------- |  | ------ | ------- | ----- | ------------------------------------ | - | ------ | - | ------- |  | --- | -
|                                         |  | Actual |         |       | For Minimum Capital AdequacyPurposes |  
|                                         |  | Amount |         | Ratio |                                      |   | Amount |   | Ratio   | 
|Total capital (to risk weighted assets)  |  | $      | 389,209 |       | 15.5                                 | % |        | $ | 201,278 |  | 8.0 | %
|Tier 1 capital (to risk weighted assets) |  |        | 316,626 |       | 12.6                                 | % |        |   | 100,639 |  | 4.0 | %
|Tier 1 capital (to average assets)       |  |        | 316,626 |       | 10.3                                 | % |        |   | 122,886 |  | 4.0 | %



Liquidity  We
manage balance sheet liquidity to fund growth in earning assets and to pay liability maturities, depository withdrawals and shareholders dividends. We strive to manage a liquidity position sufficient to meet operating requirements while
maintaining an appropriate balance between assets and liabilities to meet the expectations of our shareholders. The Companys primary source of funds is its core deposits. Core deposits exclude brokered deposits and time deposits over $100,000.
Average core deposits funded 68.8% and 68.1% of total interest-earning assets for the three months and six months ended June 30, 2004, respectively. In addition to core deposits, we have access to funds from correspondent banks and from the Federal
Home Loan Bank. The bank also accepts brokered certificates of deposit. As part of our ongoing business, we regularly evaluate acquisition possibilities and similar transactions with other financial service companies. Potential acquisitions may
involve the payment of cash or issuance of debt or equity securities. We believe that our liquidity position is adequate to meet our current and anticipated needs. For more information regarding liquidity, please refer to our 2003 Annual Report on
Form 10-K.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.



There have been no material changes in market risk we face since December 31, 2003. For more information regarding quantitative and qualitative disclosures about market risk of our financial instruments, see
Managements Discussion and Analysis of Financial Condition and Results of Operations  Interest Rate Sensitivity. Our principal market risk exposure is to interest rates.



ITEM 4. CONTROLS AND PROCEDURES.



Evaluation of Disclosure Controls and Procedures  Based on their evaluation of the Companys disclosure controls and procedures as of the end of the period covered by this report, the Companys Chief Executive
Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures are effective in ensuring that the information required to be disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.



Changes in Internal Control Over Financial Reporting  There were no changes in our internal control over financial
reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



PART II. OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS.



Not applicable.



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.



Not applicable.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES.



Not
applicable.



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##### Table of Contents

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



The Companys Annual Meeting of Stockholders was held on April 26, 2004, to consider and vote on the following proposals:



Proposal 1: The Election of Directors



The following individuals were nominated and elected as Class III directors to hold office until the 2007 annual meeting of the stockholders of the
Company or until their successors have been duly elected and qualified.



|                   |  |            |  |         
|------------------ |  | ---------- |  | --------
|                   |  | For        |  | Withheld
|James D. Calaway   |  | 37,622,602 |  | 119,325 
|Bruce J. Harper    |  | 37,669,098 |  | 72,829  
|Glenn H. Johnson   |  | 37,665,066 |  | 76,861  
|R. Bruce LaBoon    |  | 37,602,964 |  | 138,963 
|George Martinez    |  | 37,002,955 |  | 738,972 
|Steven F. Retzloff |  | 37,668,710 |  | 73,217  



The following
directors continued in office after the annual meeting:



|                     |  |                         
|-------------------- |  | ------------------------
|George Beatty, Jr.   |  | Paul Michael Mann, M.D. 
|Anat Bird            |  | G. Edward Powell        
|J. Downey Bridgwater |  | Thomas A. Reiser        
|David L. Hatcher     |  | Raimundo Riojas E.      
|James J. Kearney     |  | Howard T. Tellepsen, Jr.



Proposal 2: Approval
of the 2004 Employee Stock Purchase Plan.



|    |  |            |  |         |  |         |  |                                |  |           
|--- |  | ---------- |  | ------- |  | ------- |  | ------------------------------ |  | ----------
|For |  | 30,454,429 |  | Against |  | 444,777 |  | Abstentionsand BrokerNon-Votes |  | 6,842,721.



Proposal 3:
Ratification of the appointment of Deloitte & Touche LLP as the Companys independent public accountants for its fiscal year ending December 31, 2004.



|    |  |            |  |         |  |           |  |         |  |       
|--- |  | ---------- |  | ------- |  | --------- |  | ------- |  | ------
|For |  | 36,531,070 |  | Against |  | 1,201,308 |  | Abstain |  | 9,549.



ITEM 5. OTHER INFORMATION.



Not applicable.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|(a) | Exhibits:
|--- | ---------



|       |  |   |  |                                                                                                                                             
|------ |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------
|*10.1 |  |  |  | Consulting Agreement between Sterling Bancshares, Inc. and George Martinez executed on June 9, 2004 and effective as of June 1, 2004.       
|       |  |  
|*10.2 |  |  |  | Form of Severance and Noncompetition Agreements between Sterling Bancshares, Inc., Sterling Bank and the following named executive officers:



|                      |  |                    
|--------------------- |  | -------------------
|Daryl D. Bohls        |  | Travis Jaggers     
|Danny L. Buck         |  | Graham B. Painter  
|Wanda S. Dalton       |  | Stephen C. Raffaele
|Clinton Dunn          |  | Mike Skowronek     
|James W. Goolsby, Jr. |  |                    



30



---

##### Table of Contents

|       |  |   |  |                                                                                                                                                                  
|------ |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|11     |  |  |  | Statement Regarding Computation of Earnings Per Share (included as Note 7 to Consolidated Financial Statements on page 13 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.
|-- | ----------------------

| | Management Compensation Agreement
|- | ---------------------------------



|(b) | Reports on Form 8-K:
|--- | --------------------



| | (1) | Current Report on Form 8-K furnished on April 21, 2004 in connection with the release of Sterling Bancshares preliminary earnings report for first quarter ended March 31,
2004.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



31



---

##### Table of Contents

SIGNATURES



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



|                     |  |                           |  |                                                     
|-------------------- |  | ------------------------- |  | ----------------------------------------------------
|                     |  | STERLING BANCSHARES, INC.
|                     |  |                          
|Date: August 5, 2004 |  | By:                       |  | /s/ J. Downey Bridgwater                            
|                     |  |                           |  | J. Downey Bridgwater President and                  
|                     |  |                           |  | Chief Executive Officer                             
|                     |  |                          
|Date: August 5, 2004 |  | By:                       |  | /s/ Stephen C. Raffaele                             
|                     |  |                           |  | Stephen C. Raffaele                                 
|                     |  |                           |  | Executive Vice President and Chief Financial Officer



32



---

##### Table of Contents

EXHIBIT INDEX



|
|

|        |  |   |  |                                                                                                                                             
|------- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  | Description                                                                                                                                 
|        |  |  
|*10.1  |  |  |  | Consulting Agreement between Sterling Bancshares, Inc. and George Martinez executed on June 9, 2004 and effective as of June 1, 2004.       
|        |  |  
|*10.2  |  |  |  | Form of Severance and Noncompetition Agreements between Sterling Bancshares, Inc., Sterling Bank and the following named executive officers:



|                      |  |                    
|--------------------- |  | -------------------
|Daryl D. Bohls        |  | Travis Jaggers     
|Danny L. Buck         |  | Graham B. Painter  
|Wanda S. Dalton       |  | Stephen C. Raffaele
|Clinton Dunn          |  | Mike Skowronek     
|James W. Goolsby, Jr. |  |                    



|       |  |   |  |                                                                                                                                                                  
|------ |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|       |  |  
|11     |  |  |  | Statement Regarding Computation of Earnings Per Share (included as Note 7 to Consolidated Financial Statements on page 13 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.
|-- | ----------------------

| | Management Compensation Agreement
|- | ---------------------------------



33