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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended March 31, 2006

OR



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

For the transition period from             to

Commission file number: 0-20750

STERLING
BANCSHARES, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Texas                                                          |  | 74-2175590                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|2550 North Loop West, Suite 600 Houston, Texas                 |  | 77092                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

713-466-8300

(Registrants telephone number, including area code)

[None]

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act

Large accelerated filer ̈Accelerated filer  x                    Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).

Yes ̈No  x

Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                                          |  |                              
|----------------------------------------- |  | -----------------------------
|Class                                     |  | Outstanding at April 30, 2006
|[Common Stock, $1.00 par value per share] |  | 45,706,082 shares            



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##### Table of Contents

STERLING BANCSHARES, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2006

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 |  | 18
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 31
|Item 4.    |  | Controls and Procedures                                                               |  | 31
|           |  |                                                                                      
|PART II.   |  | OTHER INFORMATION                                                                     |  |   
|Item 1.    |  | Legal Proceedings                                                                     |  | 32
|Item 1A.   |  | Risk Factors                                                                          |  | 32
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 32
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 32
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 32
|Item 5.    |  | Other Information                                                                     |  | 32
|Item 6.    |  | Exhibits                                                                              |  | 32
|           |  |                                                                                      
|SIGNATURES |  |                                                                                       |  | 33



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)



|                                                                                                                                                                  |  |                |           |   |                   |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | ----------------- | - | --------- | -
|                                                                                                                                                                  |  | March 31, 2006 |           |   | December 31, 2005 |  
|ASSETS                                                                                                                                                            |  |                |           |   |                   |   |           |  
|Cash and cash equivalents                                                                                                                                         |  | $              | 123,013   |   |                   | $ | 147,154   |  
|Interest-bearing deposits in financial institutions                                                                                                               |  |                | 99        |   |                   |   | 99        |  
|Trading assets                                                                                                                                                    |  |                | 16,615    |   |                   |   | 28,515    |  
|Available-for-sale securities, at fair value                                                                                                                      |  |                | 488,372   |   |                   |   | 495,945   |  
|Held-to-maturity securities, at amortized cost                                                                                                                    |  |                | 124,346   |   |                   |   | 123,053   |  
|Loans held for sale                                                                                                                                               |  |                | 6,924     |   |                   |   | 8,354     |  
|Loans held for investment                                                                                                                                         |  |                | 2,751,804 |   |                   |   | 2,691,008 |  
|                                                                                                                                                                  |  |                |           |   |                   |   |           |  
|Total loans                                                                                                                                                       |  |                | 2,758,728 |   |                   |   | 2,699,362 |  
|Allowance for loan losses                                                                                                                                         |  |                | (31,116   | ) |                   |   | (31,230   | )
|                                                                                                                                                                  |  |                |           |   |                   |   |           |  
|Loans, net                                                                                                                                                        |  |                | 2,727,612 |   |                   |   | 2,668,132 |  
|                                                                                                                                                                  |  |               
|Premises and equipment, net                                                                                                                                       |  |                | 40,108    |   |                   |   | 41,407    |  
|Real estate acquired by foreclosure                                                                                                                               |  |                | 2,726     |   |                   |   | 460       |  
|Goodwill                                                                                                                                                          |  |                | 85,026    |   |                   |   | 85,026    |  
|Core deposit intangibles, net                                                                                                                                     |  |                | 3,357     |   |                   |   | 3,551     |  
|Accrued interest receivable                                                                                                                                       |  |                | 15,052    |   |                   |   | 15,358    |  
|Other assets                                                                                                                                                      |  |                | 119,252   |   |                   |   | 118,159   |  
|                                                                                                                                                                  |  |                |           |   |                   |   |           |  
|TOTAL ASSETS                                                                                                                                                      |  | $              | 3,745,578 |   |                   | $ | 3,726,859 |  
|                                                                                                                                                                  |  |                |           |   |                   |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                              |  |                |           |   |                   |   |           |  
|LIABILITIES:                                                                                                                                                      |  |                |           |   |                   |   |           |  
|Deposits:                                                                                                                                                         |  |                |           |   |                   |   |           |  
|Noninterest-bearing demand                                                                                                                                        |  | $              | 1,031,989 |   |                   | $ | 1,045,937 |  
|Interest-bearing demand                                                                                                                                           |  |                | 1,083,486 |   |                   |   | 1,017,832 |  
|Certificates and other time deposits                                                                                                                              |  |                | 844,505   |   |                   |   | 774,374   |  
|                                                                                                                                                                  |  |                |           |   |                   |   |           |  
|Total deposits                                                                                                                                                    |  |                | 2,959,980 |   |                   |   | 2,838,143 |  
|Short-term borrowings                                                                                                                                             |  |                | 280,875   |   |                   |   | 392,850   |  
|Subordinated debt                                                                                                                                                 |  |                | 45,110    |   |                   |   | 46,238    |  
|Junior subordinated debt                                                                                                                                          |  |                | 82,475    |   |                   |   | 82,475    |  
|Accrued interest payable and other liabilities                                                                                                                    |  |                | 36,857    |   |                   |   | 32,681    |  
|                                                                                                                                                                  |  |                |           |   |                   |   |           |  
|Total liabilities                                                                                                                                                 |  |                | 3,405,297 |   |                   |   | 3,392,387 |  
|                                                                                                                                                                  |  |               
|COMMITMENTS AND CONTINGENCIES                                                                                                                                     |  |                |          |   |                   |   |          |  
|                                                                                                                                                                  |  |               
|SHAREHOLDERS' EQUITY:                                                                                                                                             |  |                |           |   |                   |   |           |  
|Preferred stock, $1 par value, 1,000,000 shares authorized, no shares issued and outstanding at March 31, 2006 and December 31,
2005, respectively                |  |                |          |   |                   |   |          |  
|Common stock, $1 par value, 100,000,000 shares authorized, 45,695,269 and 45,458,500 issued and outstanding at March 31, 2006 and
December 31, 2005, respectively |  |                | 45,695    |   |                   |   | 45,458    |  
|Capital surplus                                                                                                                                                   |  |                | 62,163    |   |                   |   | 58,757    |  
|Retained earnings                                                                                                                                                 |  |                | 246,036   |   |                   |   | 239,171   |  
|Treasury stock                                                                                                                                                    |  |                | (3,975    | ) |                   |   | (1,984    | )
|Accumulated other comprehensive loss, net of tax                                                                                                                  |  |                | (9,638    | ) |                   |   | (6,930    | )
|                                                                                                                                                                  |  |                |           |   |                   |   |           |  
|Total shareholders equity                                                                                                                                        |  |                | 340,281   |   |                   |   | 334,472   |  
|                                                                                                                                                                  |  |                |           |   |                   |   |           |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                        |  | $              | 3,745,578 |   |                   | $ | 3,726,859 |  
|                                                                                                                                                                  |  |                |           |   |                   |   |           |  

See Notes to Consolidated Financial Statements.



2



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##### Table of Contents

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except
per share amounts)



|                                                      |  |                              |        |   |      |   |       
|----------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------
|                                                      |  | Three Months Ended March 31,
|                                                      |  | 2006                         |        |   | 2005
|Interest income:                                      |  |                              |        |   |      |   |       
|Loans, including fees                                 |  | $                            | 50,776 |   |      | $ | 37,991
|Securities:                                           |  |                              |        |   |      |   |       
|Taxable                                               |  |                              | 6,149  |   |      |   | 6,155 
|Non-taxable                                           |  |                              | 587    |   |      |   | 628   
|Trading assets                                        |  |                              | 300    |   |      |   | 312   
|Federal funds sold                                    |  |                              | 42     |   |      |   | 37    
|Deposits in financial institutions                    |  |                              | 58     |   |      |   | 9     
|                                                      |  |                              |        |   |      |   |       
|Total interest income                                 |  |                              | 57,912 |   |      |   | 45,132
|                                                      |  |                              |        |   |      |   |       
|Interest expense:                                     |  |                              |        |   |      |   |       
|Demand and savings deposits                           |  |                              | 3,077  |   |      |   | 1,774 
|Certificates and other time deposits                  |  |                              | 7,134  |   |      |   | 3,372 
|Short-term borrowings                                 |  |                              | 4,162  |   |      |   | 2,690 
|Subordinated debt                                     |  |                              | 1,055  |   |      |   | 813   
|Junior subordinated debt                              |  |                              | 1,792  |   |      |   | 1,690 
|                                                      |  |                              |        |   |      |   |       
|Total interest expense                                |  |                              | 17,220 |   |      |   | 10,339
|                                                      |  |                              |        |   |      |   |       
|Net interest income                                   |  |                              | 40,692 |   |      |   | 34,793
|Provision for credit losses                           |  |                              | 1,326  |   |      |   | 3,340 
|                                                      |  |                              |        |   |      |   |       
|Net interest income after provision for credit losses |  |                              | 39,366 |   |      |   | 31,453
|                                                      |  |                              |        |   |      |   |       
|Noninterest income:                                   |  |                              |        |   |      |   |       
|Customer service fees                                 |  |                              | 2,577  |   |      |   | 2,992 
|Net gain (loss) on trading assets                     |  |                              | (135   | ) |      |   | 109   
|Net gain on the sale of securities                    |  |                              |       |   |      |   | 85    
|Net gain on the sale of loans                         |  |                              | 305    |   |      |   | 257   
|Other                                                 |  |                              | 3,743  |   |      |   | 3,334 
|                                                      |  |                              |        |   |      |   |       
|Total noninterest income                              |  |                              | 6,490  |   |      |   | 6,777 
|                                                      |  |                              |        |   |      |   |       
|Noninterest expense:                                  |  |                              |        |   |      |   |       
|Salaries and employee benefits                        |  |                              | 18,675 |   |      |   | 15,394
|Occupancy expense                                     |  |                              | 3,843  |   |      |   | 3,642 
|Technology                                            |  |                              | 1,474  |   |      |   | 1,214 
|Professional fees                                     |  |                              | 1,425  |   |      |   | 1,296 
|Postage, delivery and supplies                        |  |                              | 790    |   |      |   | 750   
|Marketing                                             |  |                              | 384    |   |      |   | 645   
|Core deposit intangibles amortization                 |  |                              | 194    |   |      |   | 112   
|Other                                                 |  |                              | 4,173  |   |      |   | 3,863 
|                                                      |  |                              |        |   |      |   |       
|Total noninterest expense                             |  |                              | 30,958 |   |      |   | 26,916
|                                                      |  |                              |        |   |      |   |       
|Income before income taxes                            |  |                              | 14,898 |   |      |   | 11,314
|Provision for income taxes                            |  |                              | 4,866  |   |      |   | 3,556 
|                                                      |  |                              |        |   |      |   |       
|Net Income                                            |  | $                            | 10,032 |   |      | $ | 7,758 
|                                                      |  |                              |        |   |      |   |       
|Earnings per share:                                   |  |                              |        |   |      |   |       
|Basic                                                 |  | $                            | 0.22   |   |      | $ | 0.17  
|                                                      |  |                              |        |   |      |   |       
|Diluted                                               |  | $                            | 0.22   |   |      | $ | 0.17  
|                                                      |  |                              |        |   |      |   |       

See Notes to Consolidated Financial Statements.



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STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(UNAUDITED)

(In
thousands)



|                                                                                                     |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   |         |   |       |     |  |   |        |   |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------------------------------------- |  | --------------- |  | ------------ | - | --------------- | ------ | ----------------- | - | ------ | -------------- | ------ | ------ | --------------------------------- | - | ------- | - | ----- | --- |  | - | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                     |  | Preferred Stock |  | Common Stock |   | Capital Surplus |        | Retained Earnings |   |        | Treasury Stock |        |        | AccumulatedOtherComprehensiveLoss |   |         |   |      
|                                                                                                     |  | Shares          |  | Amount       |   | Shares          |        | Amount            |   |        |                | Shares |        | Amount                            |   |         |   | Total |    
|BALANCE AT JANUARY 1, 2005                                                                           |  |                |  | $            |  |                 | 45,068 |                   | $ | 45,068 |                | $      | 54,522 |                                   | $ | 213,814 |   |       |    |  | $ |       |   |  | $ | (232   | ) |  | $ | 313,172 |  
|Comprehensive income:                                                                                |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   |         |   |       |     |  |   |        |   |  |   |        |   |  |   |         |  
|Net income                                                                                           |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   | 7,758   |   |       |     |  |   |        |   |  |   |        |   |  |   | 7,758   |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of ($2,618) |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   |         |   |       |     |  |   |        |   |  |   | (4,863 | ) |  |   | (4,863  | )
|Less: Reclassification adjustment for gains included in net income, net of taxes of ($30)            |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   |         |   |       |     |  |   |        |   |  |   | (55    | ) |  |   | (55     | )
|                                                                                                     |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   |         |   |       |     |  |   |        |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                           |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   |         |   |       |     |  |   |        |   |  |   |        |   |  |   | 2,840   |  
|                                                                                                     |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   |         |   |       |     |  |   |        |   |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                             |  |                 |  |              |   |                 | 149    |                   |   | 149    |                |        | 1,454  |                                   |   |         |   |       |     |  |   |        |   |  |   |        |   |  |   | 1,603   |  
|Cash dividends paid                                                                                  |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   | (2,707  | ) |       |     |  |   |        |   |  |   |        |   |  |   | (2,707  | )
|                                                                                                     |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   |         |   |       |     |  |   |        |   |  |   |        |   |  |   |         |  
|BALANCE AT MARCH 31, 2005                                                                            |  |                |  | $            |  |                 | 45,217 |                   | $ | 45,217 |                | $      | 55,976 |                                   | $ | 218,865 |   |       |    |  | $ |       |   |  | $ | (5,150 | ) |  | $ | 314,908 |  
|                                                                                                     |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   |         |   |       |     |  |   |        |   |  |   |        |   |  |   |         |  
|BALANCE AT JANUARY 1, 2006                                                                           |  |                |  | $            |  |                 | 45,458 |                   | $ | 45,458 |                | $      | 58,757 |                                   | $ | 239,171 |   |       | 125 |  | $ | (1,984 | ) |  | $ | (6,930 | ) |  | $ | 334,472 |  
|Comprehensive income:                                                                                |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   |         |   |       |     |  |   |        |   |  |   |        |   |  |   |         |  
|Net income                                                                                           |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   | 10,032  |   |       |     |  |   |        |   |  |   |        |   |  |   | 10,032  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of ($1,458) |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   |         |   |       |     |  |   |        |   |  |   | (2,708 | ) |  |   | (2,708  | )
|                                                                                                     |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   |         |   |       |     |  |   |        |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                           |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   |         |   |       |     |  |   |        |   |  |   |        |   |  |   | 7,324   |  
|                                                                                                     |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   |         |   |       |     |  |   |        |   |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                             |  |                 |  |              |   |                 | 237    |                   |   | 237    |                |        | 3,406  |                                   |   |         |   |       |     |  |   |        |   |  |   |        |   |  |   | 3,643   |  
|Repurchase of common stock                                                                           |  |                 |  |              |   |                 |       |                   |   |       |                |        |        |                                   |   |         |   |       | 125 |  |   | (1,991 | ) |  |   |        |   |  |   | (1,991  | )
|Cash dividends paid                                                                                  |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   | (3,167  | ) |       |     |  |   |        |   |  |   |        |   |  |   | (3,167  | )
|                                                                                                     |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   |         |   |       |     |  |   |        |   |  |   |        |   |  |   |         |  
|BALANCE AT MARCH 31, 2006                                                                            |  |                |  | $            |  |                 | 45,695 |                   | $ | 45,695 |                | $      | 62,163 |                                   | $ | 246,036 |   |       | 250 |  | $ | (3,975 | ) |  | $ | (9,638 | ) |  | $ | 340,281 |  
|                                                                                                     |  |                 |  |              |   |                 |        |                   |   |        |                |        |        |                                   |   |         |   |       |     |  |   |        |   |  |   |        |   |  |   |         |  

See Notes to Consolidated Financial Statements.



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STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



|                                                                                  |  |                              |          |   |      |   |          |  
|--------------------------------------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                  |  | Three Months Ended March 31, |         
|                                                                                  |  | 2006                         |          |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                              |          |   |      |   |          |  
|Net income                                                                        |  | $                            | 10,032   |   |      | $ | 7,758    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                              |          |   |      |   |          |  
|Amortization and accretion of premiums and discounts on securities, net           |  |                              | 625      |   |      |   | 745      |  
|Net gain on the sale of securities                                                |  |                              |         |   |      |   | (85      | )
|Net gain on the sale of bank assets                                               |  |                              | (11      | ) |      |   | (13      | )
|Net (gain) loss on trading assets                                                 |  |                              | 135      |   |      |   | (109     | )
|Net gain on sale of loans                                                         |  |                              | (305     | ) |      |   | (257     | )
|Provision for credit losses                                                       |  |                              | 1,326    |   |      |   | 3,340    |  
|Writedowns, less gains on sale, of real estate acquired by foreclosure            |  |                              | (29      | ) |      |   | (16      | )
|Depreciation and amortization                                                     |  |                              | 2,090    |   |      |   | 1,926    |  
|Proceeds from sales of trading assets                                             |  |                              | 11,890   |   |      |   | 62,437   |  
|Purchases of trading assets                                                       |  |                              | (274     | ) |      |   | (42,191  | )
|Proceeds from principal paydowns of trading securities                            |  |                              | 148      |   |      |   | 386      |  
|Stock-based compensation expense (net of tax benefit recognized)                  |  |                              | 431      |   |      |   |         |  
|Excess tax benefits from share-based payment arrangements                         |  |                              | (386     | ) |      |   |         |  
|Net decrease (increase) in loans held for sale                                    |  |                              | 1,687    |   |      |   | (3,473   | )
|Net (increase) decrease in accrued interest receivable and other assets           |  |                              | (518     | ) |      |   | 1,489    |  
|Net decrease in accrued interest payable and other liabilities                    |  |                              | 3,468    |   |      |   | 1,112    |  
|                                                                                  |  |                              |          |   |      |   |          |  
|Net cash provided by operating activities                                         |  |                              | 30,309   |   |      |   | 33,049   |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                              |          |   |      |   |          |  
|Proceeds from the maturities or calls and paydowns of held-to-maturity securities |  |                              | 4,341    |   |      |   | 6,591    |  
|Proceeds from the sale of available-for-sale securities                           |  |                              |         |   |      |   | 35,443   |  
|Proceeds from maturities or calls and paydowns of available-for-sale securities   |  |                              | 26,703   |   |      |   | 32,174   |  
|Purchases of available-for-sale securities                                        |  |                              | (23,884  | ) |      |   | (86,580  | )
|Purchases of held-to-maturity securities                                          |  |                              | (5,671   | ) |      |   | (8,934   | )
|Net increase in loans held for investment                                         |  |                              | (64,890  | ) |      |   | (100,454 | )
|Proceeds from sale of real estate acquired by foreclosure                         |  |                              | 219      |   |      |   | 741      |  
|Proceeds from sale of land held for sale                                          |  |                              | 1,570    |   |      |   |         |  
|Net increase in interest-bearing deposits in financial institutions               |  |                              |         |   |      |   | (472     | )
|Proceeds from sale of premises and equipment                                      |  |                              | 61       |   |      |   | 15       |  
|Purchase of premises and equipment                                                |  |                              | (640     | ) |      |   | (770     | )
|                                                                                  |  |                              |          |   |      |   |          |  
|Net cash used in investing activities                                             |  |                              | (62,191  | ) |      |   | (122,246 | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                              |          |   |      |   |          |  
|Net increase in deposits                                                          |  |                              | 121,837  |   |      |   | 49,896   |  
|Net (decrease) increase in short-term borrowings                                  |  |                              | (111,975 | ) |      |   | 55,740   |  
|Proceeds from issuance of common stock                                            |  |                              | 2,651    |   |      |   | 1,603    |  
|Repurchase of common stock                                                        |  |                              | (1,991   | ) |      |   |         |  
|Excess tax benefits from share-based payment arrangements                         |  |                              | 386      |   |      |   |         |  
|Dividends paid                                                                    |  |                              | (3,167   | ) |      |   | (2,707   | )
|                                                                                  |  |                              |          |   |      |   |          |  
|Net cash provided by financing activities                                         |  |                              | 7,741    |   |      |   | 104,532  |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                              |  |                              | (24,141  | ) |      |   | 15,335   |  
|CASH AND CASH EQUIVALENTS:                                                        |  |                              |          |   |      |   |          |  
|Beginning of period                                                               |  |                              | 147,154  |   |      |   | 88,439   |  
|                                                                                  |  |                              |          |   |      |   |          |  
|End of period                                                                     |  | $                            | 123,013  |   |      | $ | 103,774  |  
|                                                                                  |  |                              |          |   |      |   |          |  
|Supplemental information:                                                         |  |                              |          |   |      |   |          |  
|Interest paid                                                                     |  | $                            | 16,718   |   |      | $ | 9,910    |  
|Noncash investing and financing activities                                       |  |                              |          |   |      |   |          |  
|Acquisitions of real estate through foreclosure of collateral                     |  |                              | 2,457    |   |      |   | 146      |  

See Notes to Consolidated Financial Statements



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STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.    ACCOUNTING
POLICIES

Basis of Presentation

The
consolidated Financial Statements are unaudited and include the accounts of Sterling Bancshares and its subsidiaries (the Company) except for those subsidiaries where it has been determined that the Company is not the primary
beneficiary. The Companys accounting and financial reporting policies are in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to
Form 10-Q. The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature
unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. The interim financial information should be read with the
Companys 2005 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

Statement of Accounting
StandardsNo. 123R, Share-Based Payment (Revised 2004) (SFAS 123R) established standards for accounting for 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. SFAS 123R eliminated the ability to account for stock-based
compensation using the intrinsic value-based method of accounting, and requires that such transactions be recognized as compensation expense in the income statement based on their fair values on the date of grant. SFAS 123R applies to new
awards and to awards modified, repurchased, or cancelled after January 1, 2006. Additionally, compensation expense for the portion of awards for which the requisite service has not been rendered (generally referring to non-vested awards) that
are outstanding as of January 1, 2006 will be recognized over the remaining vesting period. The Company used the modified prospective application in implementing SFAS 123R. Beginning in 2006, the Companys results of operations reflect
compensation expense for all employee stock-based compensation, including the unvested portion of stock options granted prior to 2006. Prior to 2006, the Company accounted for stock-based employee compensation using the intrinsic value-based method
of accounting, as permitted. Under the intrinsic value-based method of accounting, no compensation expense was recognized for the Companys incentive stock options or for the Companys employee stock purchase plan. The adoption of this
accounting standard resulted in additional stock-based compensation expense of $107 thousand for the three month period ended March 31, 2006 attributable to stock options and the Companys employee stock purchase plan. There was no income
tax benefit recorded for this additional stock-based compensation expense. The adoption of this accounting standard did not have a meaningful impact on earnings per share for the same time period.

In February 2006, the Financial Accounting Standard Board (FASB) issued Statement of Accounting Standards No. 155 (SFAS 155) Accounting
for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140. It establishes, among other things, the accounting for certain derivatives embedded in other financial instruments. The primary objective of this
Statement with respect to FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, is to simplify accounting for any hybrid financial instrument that contains an embedded derivative that would otherwise
require bifurcation. The primary objective of this Statement with respect to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, is to eliminate a restriction on the
passive derivative instruments that a qualifying special-purpose entity (QSPE) may hold. This statement is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after
September 15, 2006. The



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adoption of this accounting standard is not expected to have a material impact on the Companys financial statements.

In March 2006, the FASB issued Statement of Accounting Standards No. 156 (SFAS 156) Accounting for Servicing of Financial Assets, an amendment of
FASB Statement No. 140. It establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities. This Statement amends Statement 140 to require that all separately recognized servicing assets
and servicing liabilities be initially measured at fair value, if practicable. This statement is effective for fiscal years beginning after September 15, 2006. The adoption of this accounting standard is not expected to have a material impact
on the Companys financial statements.

Stock-Based Compensation

The Company adopted SFAS 123R on January 1, 2006. See Recent Accounting Standards above.

The pro-forma net income and
earnings per share information for the three month period ended March 31, 2005 presented below was determined as if we had accounted for our employee stock-based compensation under the fair value method (dollars in thousands except for per
share amounts).



|                                                                                                                     |  |   |       |  
|-------------------------------------------------------------------------------------------------------------------- |  | - | ----- | -
|Net income, as reported                                                                                              |  | $ | 7,758 |  
|Add: Stock-based employee compensation expense included in reported net income, net of related tax effect            |  |   |      |  
|Less: Total stock-based employee compensation expense determined under fair value-based method, net of related taxes |  |   | (131  | )
|                                                                                                                     |  |   |       |  
|Pro-forma net income                                                                                                 |  | $ | 7,627 |  
|                                                                                                                     |  |   |       |  
|Earnings per share:                                                                                                  |  |   |       |  
|Basicas reported                                                                                                    |  | $ | 0.17  |  
|                                                                                                                     |  |   |       |  
|Basicpro-forma                                                                                                      |  | $ | 0.17  |  
|                                                                                                                     |  |   |       |  
|Dilutedas reported                                                                                                  |  | $ | 0.17  |  
|                                                                                                                     |  |   |       |  
|Dilutedpro-forma                                                                                                    |  | $ | 0.17  |  
|                                                                                                                     |  |   |       |  



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2.    SECURITIES

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



|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|------------------------------------------------------------------ |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                                   |  | March 31, 2006   
|                                                                   |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                 |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S Treasury and other U.S. government agencies |  | $                 | 10,020  |                      | $ |                      |  | $ | (141       | ) |  | $ | 9,879  
|Obligations of states of the U.S. and political subdivisions       |  |                   | 2,500   |                      |   | 22                    |  |   | (3         | ) |  |   | 2,519  
|Mortgage-backed securities and collateralized mortgage obligations |  |                   | 474,258 |                      |   | 168                   |  |   | (14,150    | ) |  |   | 460,276
|Other securities                                                   |  |                   | 16,422  |                      |   |                      |  |   | (724       | ) |  |   | 15,698 
|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                              |  | $                 | 503,200 |                      | $ | 190                   |  | $ | (15,018    | ) |  | $ | 488,372
|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions       |  | $                 | 56,768  |                      | $ | 540                   |  | $ | (488       | ) |  | $ | 56,820 
|Mortgage-backed securities and collateralized mortgage obligations |  |                   | 67,578  |                      |   |                      |  |   | (1,496     | ) |  |   | 66,082 
|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                              |  | $                 | 124,346 |                      | $ | 540                   |  | $ | (1,984     | ) |  | $ | 122,902
|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|                                                                   | 
|                                                                   |  | December 31, 2005
|                                                                   |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                 |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S Treasury and other U.S. government agencies |  | $                 | 10,031  |                      | $ |                      |  | $ | (107       | ) |  | $ | 9,924  
|Obligations of states of the U.S. and political subdivisions       |  |                   | 3,303   |                      |   | 27                    |  |   | (4         | ) |  |   | 3,326  
|Mortgage-backed securities and collateralized mortgage obligations |  |                   | 476,541 |                      |   | 286                   |  |   | (10,099    | ) |  |   | 466,728
|Other securities                                                   |  |                   | 16,732  |                      |   |                      |  |   | (765       | ) |  |   | 15,967 
|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                              |  | $                 | 506,607 |                      | $ | 313                   |  | $ | (10,975    | ) |  | $ | 495,945
|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions       |  | $                 | 58,288  |                      | $ | 649                   |  | $ | (562       | ) |  | $ | 58,375 
|Mortgage-backed securities and collateralized mortgage obligations |  |                   | 64,765  |                      |   | 9                     |  |   | (1,134     | ) |  |   | 63,640 
|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                              |  | $                 | 123,053 |                      | $ | 658                   |  | $ | (1,696     | ) |  | $ | 122,015
|                                                                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        



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The contractual maturities of securities at March 31, 2006 are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Dollar amounts are shown in thousands.



|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|------------------------------------------------------------------ |  | ------------------ | ------- | ---------------- | - | ------------- |  | ---------- | ------- |  | - | -------
|                                                                   |  | Available-for-Sale |         | Held-to-Maturity
|                                                                   |  | AmortizedCost      |         | Fair Value       |   | AmortizedCost |  | Fair Value
|Due in one year or less                                            |  | $                  | 4,362   |                  | $ | 4,349         |  | $          | 5,786   |  | $ | 5,816  
|Due after one year through five years                              |  |                    | 7,116   |                  |   | 6,994         |  |            | 28,176  |  |   | 28,394 
|Due after five years through ten years                             |  |                    | 1,042   |                  |   | 1,055         |  |            | 22,806  |  |   | 22,610 
|Due after ten years                                                |  |                    |        |                  |   |              |  |            |        |  |   |       
|Mortgage-backed securities and collateralized mortgage obligations |  |                    | 474,258 |                  |   | 460,276       |  |            | 67,578  |  |   | 66,082 
|Other securities                                                   |  |                    | 16,422  |                  |   | 15,698        |  |            |        |  |   |       
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|Total                                                              |  | $                  | 503,200 |                  | $ | 488,372       |  | $          | 124,346 |  | $ | 122,902
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        

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 monthsended March 31, |  
|                              |  | 2006                        |   | 2005 |  
|Proceeds from sales and calls |  | $                           |  |      | $ | 35,443 |  
|Gross realized gains          |  |                             |  |      |   | 138    |  
|Gross realized losses         |  |                             |  |      |   | (53    | )

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



|                                                                   |  |                     |         |                       |   |        |            |  |               |         |                       |   |         |            |   |         |   |  |   |        
|------------------------------------------------------------------ |  | ------------------- | ------- | --------------------- | - | ------ | ---------- |  | ------------- | ------- | --------------------- | - | ------- | ---------- | - | ------- | - |  | - | -------
|                                                                   |  | March 31, 2006     
|                                                                   |  | Less than 12 Months |         | More than 12 Months  
|                                                                   |  | AmortizedCost       |         | GrossUnrealizedLosses |   |        | Fair Value |  | AmortizedCost |         | GrossUnrealizedLosses |   |         | Fair Value
|Available-for-Sale                                                 |  |                     |         |                       |   |        |            |  |               |         |                       |   |         |            |   |         |   |  |   |        
|Obligations of the U.S Treasury and other U.S. government agencies |  | $                   | 2,511   |                       | $ | (4     | )          |  | $             | 2,507   |                       | $ | 7,509   |            | $ | (137    | ) |  | $ | 7,372  
|Obligations of states of the U.S. and political subdivisions       |  |                     | 741     |                       |   | (3     | )          |  |               | 738     |                       |   | 20      |            |   |        |   |  |   | 20     
|Mortgage-backed securities and collateralized mortgage obligations |  |                     | 160,248 |                       |   | (2,891 | )          |  |               | 157,357 |                       |   | 304,058 |            |   | (11,259 | ) |  |   | 292,799
|Other securities                                                   |  |                     | 7,901   |                       |   | (238   | )          |  |               | 7,663   |                       |   | 8,346   |            |   | (486    | ) |  |   | 7,860  
|                                                                   |  |                     |         |                       |   |        |            |  |               |         |                       |   |         |            |   |         |   |  |   |        
|Total                                                              |  | $                   | 171,401 |                       | $ | (3,136 | )          |  | $             | 168,265 |                       | $ | 319,933 |            | $ | (11,882 | ) |  | $ | 308,051
|                                                                   |  |                     |         |                       |   |        |            |  |               |         |                       |   |         |            |   |         |   |  |   |        
|                                                                   |  |                     |         |                       |   |       
|Held-to-Maturity                                                   |  |                     |         |                       |   |        |            |  |               |         |                       |   |         |            |   |         |   |  |   |        
|Obligations of states of the U.S. and political subdivisions       |  | $                   | 13,554  |                       | $ | (140   | )          |  | $             | 13,414  |                       | $ | 12,418  |            | $ | (348    | ) |  | $ | 12,070 
|Mortgage-backed securities and collateralized mortgage obligations |  |                     | 34,922  |                       |   | (522   | )          |  |               | 34,400  |                       |   | 32,557  |            |   | (974    | ) |  |   | 31,583 
|                                                                   |  |                     |         |                       |   |        |            |  |               |         |                       |   |         |            |   |         |   |  |   |        
|Total                                                              |  | $                   | 48,476  |                       | $ | (662   | )          |  | $             | 47,814  |                       | $ | 44,975  |            | $ | (1,322  | ) |  | $ | 43,653 
|                                                                   |  |                     |         |                       |   |        |            |  |               |         |                       |   |         |            |   |         |   |  |   |        

Declines in the fair value of individual securities below their cost that are other-than-temporary would result in
writedowns, as a realized loss, of the individual securities to their fair value. In evaluating other-than-temporary



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impairment losses, management considers several factors including the severity and the duration that the fair value has been less than cost, the credit
quality of the issuer, and the intent and ability of the Company to hold the security until recovery of the fair value. The average loss on securities in an unrealized loss position was 2.9% of the amortized cost basis at March 31, 2006. There
were no securities in a loss position greater than 10% of the Companys amortized cost basis at March 31, 2006. Management believes that the unrealized losses on the Companys securities portfolio were caused primarily by interest
rate increases. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because the Company has the ability and intent to hold those investments until a recovery of fair value, which may be
maturity, the Company does not consider those investments to be other-than-temporarily impaired at March 31, 2006.

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 March 31, 2006.

Securities with carrying values totaling $396.3 million and fair values totaling $386.7 million were pledged to secure public deposits at March 31, 2006.

3.    LOANS

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



|                                |  |                |           |   |                   |   |        |   |           |  |       |  
|------------------------------- |  | -------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                |  | March 31, 2006 |           |   | December 31, 2005 |  
|                                |  | Amount         |           | % |                   |   | Amount |   | %         | 
|Loans held for sale             |  | $              | 6,924     |   | 0.3               | % |        | $ | 8,354     |  | 0.3   | %
|Loans held for investment       |  |                |           |   |                   |   |        |   |           |  |       |  
|Domestic                        |  |                |           |   |                   |   |        |   |           |  |       |  
|Commercial and industrial       |  |                | 751,993   |   | 27.2              | % |        |   | 738,061   |  | 27.3  | %
|Real estate:                    |  |                |           |   |                   |   |        |   |           |  |       |  
|Commercial                      |  |                | 1,263,753 |   | 45.8              | % |        |   | 1,221,610 |  | 45.3  | %
|Construction                    |  |                | 454,987   |   | 16.4              | % |        |   | 438,454   |  | 16.2  | %
|Residential mortgage            |  |                | 178,423   |   | 6.5               | % |        |   | 190,701   |  | 7.1   | %
|Consumer/other                  |  |                | 70,673    |   | 2.6               | % |        |   | 72,937    |  | 2.7   | %
|Foreign                         |  |                |           |   |                   |   |        |   |           |  |       |  
|Commercial and industrial       |  |                | 29,080    |   | 1.1               | % |        |   | 26,080    |  | 1.0   | %
|Other loans                     |  |                | 2,895     |   | 0.1               | % |        |   | 3,165     |  | 0.1   | %
|                                |  |                |           |   |                   |   |        |   |           |  |       |  
|Total loans held for investment |  |                | 2,751,804 |   | 99.7              | % |        |   | 2,691,008 |  | 99.7  | %
|                                |  |                |           |   |                   |   |        |   |           |  |       |  
|Total loans                     |  | $              | 2,758,728 |   | 100.0             | % |        | $ | 2,699,362 |  | 100.0 | %
|                                |  |                |           |   |                   |   |        |   |           |  |       |  

Loan maturities and rate sensitivity of the loans held for investment excluding residential mortgage and consumer
loans, at March 31, 2006 are as follows (in thousands):



|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|----------------------------------- |  | ---------------------- | --------- | ---------------------------------- | - | ------------------- |  | ----- | ------- |  | - | ---------
|                                    |  | Due in OneYear or Less |           | Due AfterOne YearThroughFive Years |   | Due AfterFive Years |  | Total
|Commercial and industrial           |  | $                      | 602,371   |                                    | $ | 138,235             |  | $     | 11,387  |  | $ | 751,993  
|Real estate - commercial            |  |                        | 723,048   |                                    |   | 412,183             |  |       | 128,522 |  |   | 1,263,753
|Real estate - construction          |  |                        | 370,882   |                                    |   | 71,565              |  |       | 12,540  |  |   | 454,987  
|Foreign loans                       |  |                        | 10,095    |                                    |   | 21,880              |  |       |        |  |   | 31,975   
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|Total                               |  | $                      | 1,706,396 |                                    | $ | 643,863             |  | $     | 152,449 |  | $ | 2,502,708
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|Loans with a fixed interest rate    |  | $                      | 174,413   |                                    | $ | 556,940             |  | $     | 126,784 |  | $ | 858,137  
|Loans with a floating interest rate |  |                        | 1,531,983 |                                    |   | 86,923              |  |       | 25,665  |  |   | 1,644,571
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|Total                               |  | $                      | 1,706,396 |                                    | $ | 643,863             |  | $     | 152,449 |  | $ | 2,502,708
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          



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The loan portfolio consists of various types of loans made principally to borrowers located in the Houston, Dallas and
San Antonio metropolitan areas. As of March 31, 2006, there was no concentration of loans to any one type of industry exceeding 10% of total loans nor were there any loans classified as highly leveraged transactions.

As of March 31, 2006 and December 31, 2005, loans from Sterling Bank outstanding to directors, officers and their affiliates were $7.1 million and $9.0
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 three months ended March 31, 2006, there were no principal additions while principal payments were $92 thousand. Insider loans were reduced by $1.8 million because a director with an insider loan was no longer
serving on the board during the three months ended March 31, 2006.

The recorded investment in impaired loans was $20.5 million and $22.4 million, at
March 31, 2006 and December 31, 2005, respectively. Such impaired loans required an allowance for loan losses of $3.4 million and $4.2 million, respectively. The average recorded investment in impaired loans for the three months ended
March 31, 2006 and 2005 was $23.2 million and $17.4 million, respectively. Interest income on impaired loans of $25 thousand was recognized for cash payments received for the three months ended March 31, 2005. No interest on impaired loans
was received for the three months ended March 31, 2006.

Included in impaired loans are nonperforming loans of $19.2 million and $21.8 million at
March 31, 2006 and December 31, 2005, respectively, which have been categorized by management as nonaccrual. Interest foregone on nonaccrual loans for the three months ended March 31, 2006 and 2005 was approximately $760 thousand and
$537 thousand, respectively. The Company did not have any restructured loans as of March 31, 2006 or December 31, 2005.

When management doubts a
borrowers ability to meet payment obligations, typically when principal or interest payments are more than 90 days past due, the loans are placed on nonaccrual status. Loans 90 days or more past due, not on nonaccrual were $3.3 million and
$162 thousand at March 31, 2006 and December 31, 2005, respectively.

4.    ALLOWANCE FOR CREDIT LOSSES

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



|                                                                          |  |                             |        |   |      |   |        |  
|------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                          |  | Three Months EndedMarch 31, |       
|                                                                          |  | 2006                        |        |   | 2005 |  
|Allowance for loan losses at beginning of the period                      |  | $                           | 31,230 |   |      | $ | 29,406 |  
|Loans charged-off                                                         |  |                             | 2,146  |   |      |   | 2,365  |  
|Loan recoveries                                                           |  |                             | (508   | ) |      |   | (387   | )
|                                                                          |  |                             |        |   |      |   |        |  
|Net loans charged-off                                                     |  |                             | 1,638  |   |      |   | 1,978  |  
|Provision for loan losses                                                 |  |                             | 1,524  |   |      |   | 3,332  |  
|                                                                          |  |                             |        |   |      |   |        |  
|Allowance for loan losses at end of the period                            |  |                             | 31,116 |   |      |   | 30,760 |  
|                                                                          |  |                             |        |   |      |   |        |  
|Reserve for losses on unfunded lending commitments at beginning of period |  |                             | 1,173  |   |      |   | 826    |  
|Provision for losses on unfunded lending commitments                      |  |                             | (198   | ) |      |   | 8      |  
|                                                                          |  |                             |        |   |      |   |        |  
|Reserve for losses on unfunded lending commitments at end of period       |  |                             | 975    |   |      |   | 834    |  
|                                                                          |  |                             |        |   |      |   |        |  
|Total allowance for credit losses                                         |  | $                           | 32,091 |   |      | $ | 31,594 |  
|                                                                          |  |                             |        |   |      |   |        |  



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5.    GOODWILL AND OTHER INTANGIBLES

The changes in the carrying amount of goodwill by reporting unit for the year ended December 31, 2005, and the period ended March 31, 2006, were as follows (in
thousands):



|                                   |  |         |        |            |   |        |  |       |        |  |   |       
|---------------------------------- |  | ------- | ------ | ---------- | - | ------ |  | ----- | ------ |  | - | ------
|                                   |  | Houston |        | SanAntonio |   | Dallas |  | Total
|Balance, January 1, 2005           |  | $       | 29,613 |            | $ | 27,205 |  | $     | 5,662  |  | $ | 62,480
|Prestonwood Bancshares acquisition |  |         |       |            |   |        |  |       | 22,546 |  |   | 22,546
|                                   |  |         |        |            |   |        |  |       |        |  |   |       
|Balance, December 31, 2005         |  |         | 29,613 |            |   | 27,205 |  |       | 28,208 |  |   | 85,026
|Goodwill adjustment                |  |         |       |            |   |       |  |       |       |  |   |      
|                                   |  |         |        |            |   |        |  |       |        |  |   |       
|Balance, March 31, 2006            |  | $       | 29,613 |            | $ | 27,205 |  | $     | 28,208 |  | $ | 85,026
|                                   |  |         |        |            |   |        |  |       |        |  |   |       

The changes in the carrying amounts of core deposit intangibles for the year ended December 31, 2005, and the
period ended March 31, 2006, were as follows (in thousands):



|                                   |  |                        |       |  
|---------------------------------- |  | ---------------------- | ----- | -
|                                   |  | CoreDepositIntangibles |      
|Balance, January 1, 2005           |  | $                      | 1,839 |  
|Amortization expense               |  |                        | (521  | )
|Prestonwood Bancshares acquisition |  |                        | 2,233 |  
|                                   |  |                        |       |  
|Balance, December 31, 2005         |  |                        | 3,551 |  
|Amortization expense               |  |                        | (194  | )
|                                   |  |                        |       |  
|Balance, March 31, 2006            |  | $                      | 3,357 |  
|                                   |  |                        |       |  

6.    STOCK-BASED COMPENSATION

The 2003 Stock Incentive and Compensation Plan (the 2003 Stock Plan), which has been approved by the shareholders, permits the grant of unrestricted stock
awards, restricted stock awards, stock appreciation rights or stock options for up to 2,150,000 shares of common stock. Certain share awards granted under previous shareholder-approved plans are still outstanding and unvested at March 31,
2006.

Options are granted to officers and employees at exercise prices determined by the Human Resources Programs Committee (Committee) of the
Board of Directors. These options generally have exercise prices equal to the fair market value of the common stock at the date of grant, vest ratably over a four-year period and must be exercised within ten years from the date of grant. Restricted
stock awards generally vest over four years. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the 2003 Stock Plan).

Total stock-based compensation expense that was charged against income for the three month period ended March 31, 2006 was $606 thousand. The total income tax benefit recognized in the income statement for
share-based compensation arrangements was $175 thousand for the three months ended March 31, 2006. There was no income tax benefit recognized in the income statement for the three month period ended March 31, 2005.

Cash received for exercises under all share-based payment arrangements during the three month periods ended March 31, 2006 and 2005 was $2.6 million and $1.4
million, respectively. The actual tax benefit realized for the tax deductions under all share-based payment arrangements totaled $386 thousand and $202 thousand, respectively, for the three month periods ended March 31, 2006 and 2005.

The Company issues new shares for exercises of all share-based payment arrangements.



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Stock Options  The fair value of each option award is estimated on the date of grant using a
Black-Scholes-Merton option valuation model that uses the assumptions noted in the following table. The Black-Scholes-Merton formula assumes that option exercises occur at the end of an options contractual term, and that expected
volatility, expected dividends, and risk-free interest rates are constant over the options term. The Black-Scholes-Merton formula is adjusted to take into account certain characteristics of employee share options and similar instruments
that are not consistent with the models assumptions. Because of the nature of the formula, those adjustments take the form of weighted-average assumptions about those characteristics. The expected term represents the period of time that
options granted are expected to be outstanding. The risk-free interest rate of the option is based on the U.S. Treasury zero-coupon with a remaining term equal to the expected term used in the assumption model. The historical volatility is a measure
of fluctuations in the Companys share price.



|                        |  |           |   |  |       |  
|----------------------- |  | --------- | - |  | ----- | -
|                        |  | March 31, |  
|                        |  | 2006      |   |  | 2005  |  
|Expected term (years)   |  | 4.75      |   |  | 4.33  |  
|Risk-free interest rate |  | 4.44      | % |  | 4.08  | %
|Historical volatility   |  | 30.15     | % |  | 19.06 | %
|Dividend yield          |  | 1.70      | % |  | 1.69  | %

A summary of changes in outstanding stock options during the three months ended March 31, 2006 were as
follows:



|                                         |  |                       |   |  |                              |       |                                         |      |                                        |   |      
|---------------------------------------- |  | --------------------- | - |  | ---------------------------- | ----- | --------------------------------------- | ---- | -------------------------------------- | - | -----
|                                         |  | Shares (In thousands) |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm |      | AggregateIntrinsicValue (In thousands)
|Shares under option, beginning of period |  | 1,314                 |   |  | $                            | 10.95 |                                         |      |                                        |   |      
|Shares granted                           |  | 88                    |   |  |                              | 15.73 |                                         |      |                                        |   |      
|Shares forfeited or expired              |  | (9                    | ) |  |                              | 13.17 |                                         |      |                                        |   |      
|Shares exercised                         |  | (218                  | ) |  |                              | 11.53 |                                         |      |                                        |   |      
|                                         |  |                       |   |  |                              |       |                                         |      |                                        |   |      
|Shares under option, end of period       |  | 1,175                 |   |  | $                            | 10.93 |                                         | 5.15 |                                        | $ | 8,371
|                                         |  |                       |   |  |                              |       |                                         |      |                                        |   |      
|Shares exercisable, end of period        |  | 924                   |   |  | $                            | 9.98  |                                         | 3.87 |                                        | $ | 7,464
|                                         |  |                       |   |  |                              |       |                                         |      |                                        |   |      

The weighted-average grant-date fair value of the options granted during three month periods ended March 31,
2006 and 2005 was $4.43 and $2.77, respectively. The total intrinsic value of options exercised during the three month periods ended March 31, 2006 and 2005, was $1.3 million and $778 thousand, respectively.

Share Awards  A summary of the status of the Companys nonvested share awards is presented below (shares in thousands):



|                                            |  |                              |   |      |                                     |       |        |    |   |                                     |   |      
|------------------------------------------- |  | ---------------------------- | - | ---- | ----------------------------------- | ----- | ------ | -- | - | ----------------------------------- | - | -----
|                                            |  | Three months ended March 31,
|                                            |  | 2006                         |   | 2005
|                                            |  | Shares                       |   |      | WeightedAverageGrant-DateFair Value |       | Shares |    |   | WeightedAverageGrant-DateFair Value
|Nonvested share awards, beginning of period |  | 106                          |   |      | $                                   | 13.52 |        | 41 |   |                                     | $ | 13.53
|Shares granted                              |  | 43                           |   |      |                                     | 16.36 |        | 15 |   |                                     |   | 14.28
|Shares forfeited                            |  | (2                           | ) |      |                                     | 14.18 |        |   |   |                                     |   |     
|Shares vested                               |  | (17                          | ) |      |                                     | 16.34 |        | (3 | ) |                                     |   | 14.27
|                                            |  |                              |   |      |                                     |       |        |    |   |                                     |   |      
|Nonvested share awards, end of period       |  | 130                          |   |      | $                                   | 14.06 |        | 53 |   |                                     | $ | 13.71
|                                            |  |                              |   |      |                                     |       |        |    |   |                                     |   |      



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As of March 31, 2006, there was $1.3 million of total unrecognized compensation expense related to nonvested
share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 2.49 years. The total fair value of shares vested during the three months ended March 31, 2006 was $299 thousand.

The Company grants certain executives and other key employees restricted stock awards whose vesting is contingent upon meeting various office,
departmental and company-wide annual performance goals. The fair value of each share grant was estimated using the current public market price of the Companys common stock on March 31, 2006 and assumes that performance goals will be
achieved. If such goals are not met, no future compensation expense will be recognized and any previously recognized compensation expense will be reversed. There were 9,000 performance-based contingent grants outstanding at March 31, 2006
and December 31, 2005. There was no unrecognized compensation expense for these grants at March 31, 2006.

Effective January 1, 2006, the
Company entered into an employment agreement with its chief executive officer (Executive). This agreement establishes, among other things, certain incentive compensation terms which include equity incentives under the 2003 Stock Plan.
The Executive was awarded 125,000 Performance Restricted Shares Units (PRSU). The PRSUs will be earned subject to certain performance measures over a four year period. These performance measures include annual growth in earnings per
share, average return on equity and an overall board evaluation. Based on these criteria, the Executive will earn a specific number of the eligible share units. In addition to the PRSUs, the Executive will earn up to 125,000 bonus shares subject to
the same performance measures. The employment agreement also includes a severance and non-competition agreement. Under this agreement, upon termination of employment under the circumstances described in the agreement, the Executive would become
vested in a specified number of bonus shares. The fair value of each PRSU and bonus share was estimated based on expected performance goals being attained and using the current public market price of the Companys common stock at March 31,
2006. As of March 31, 2006, there was $2.1 million of total unrecognized compensation expense related to the PRSUs and bonus shares. This cost is expected to be recognized over a remaining period of 3.75 years. If performance measures are
not met, no future compensation expense will be recognized and any previously recognized compensation expense will be reversed.

Stock purchase
plan  The Company offers the 2004 Employee Stock Purchase Plan (the Purchase Plan) to eligible employees. An aggregate of 1.5 million shares of Company common stock may be issued under this plan subject to adjustment
upon changes in capitalization. The Purchase Plan is a compensatory benefit plan to all employees who are employed for more than 20 hours per week and meet minimum length-of-service requirements of three months. The Purchase Plan is subscribed
through payroll deduction which may not exceed 10% of the eligible employees compensation. The purchase price for shares available under the Purchase Plan is 90% of the lower of the fair market value on either the first or last day of each
quarter. Compensation expense associated with the Purchase Plan was determined using a Black-Scholes-Merton option pricing formula. Assumptions used in this formula were the same as disclosed above for incentive stock options except that an expected
term of three months was used. During the three months ended March 31, 2006 and 2005, 6,005 shares and 5,444 shares, respectively were subscribed for through payroll deductions under the Purchase Plan.



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7.    EARNINGS PER COMMON SHARE

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



|                                        |  |                             |        |      |   |       
|--------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                        |  | Three months endedMarch 31,
|                                        |  | 2006                        |        | 2005
|Net income                              |  | $                           | 10,032 |      | $ | 7,758 
|Basic:                                  |  |                             |        |      |   |       
|Weighted average shares outstanding     |  |                             | 45,333 |      |   | 45,131
|Diluted:                                |  |                             |        |      |   |       
|Add incremental shares for:             |  |                             |        |      |   |       
|Assumed exercise of outstanding options |  |                             | 461    |      |   | 466   
|                                        |  |                             |        |      |   |       
|Total                                   |  |                             | 45,794 |      |   | 45,597
|                                        |  |                             |        |      |   |       
|Earnings per share:                     |  |                             |        |      |   |       
|Basic                                   |  | $                           | 0.22   |      | $ | 0.17  
|                                        |  |                             |        |      |   |       
|Diluted                                 |  | $                           | 0.22   |      | $ | 0.17  
|                                        |  |                             |        |      |   |       

The incremental shares for the assumed exercise of the outstanding options were determined by application of the
treasury stock method. The calculation of diluted earnings per share excludes 85,800 and 98,421 options outstanding for the three months ended March 31, 2006 and 2005, respectively, that 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 $1.1 million and $871 thousand for the three months ended March 31, 2006 and 2005. There have been no significant changes in future minimum lease payments by the Company since December 31, 2005. Refer to the 2005 Form 10-K
for information regarding these commitments.

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

Severance and non-competition agreements  The Company has entered into severance and non-competition agreements with its chief executive officer
(discussed in Note 6) and certain other executive officers. Under the agreements with other executive officers, upon a termination of employment under the circumstances described in the agreements, each would receive: (i) two years base
pay; (ii) an annual bonus for two years in an amount equal to the highest annual bonus paid to the respective executive officer during the three years preceding termination or change in control (as defined in the agreement);
(iii) continued eligibility for Company perquisites, welfare and life insurance benefit plans, to the extent permitted, and in the event participation is not permitted, payment of the cost of such welfare benefits for a period of two years
following termination of employment; (iv) payment of up to $20,000 in job placement fees; and (v) to the extent permitted by law or the applicable plan, accelerated vesting and termination of all forfeiture provisions under all benefit
plans, options, restricted stock grants or other similar awards.



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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):



|                             |  |               |         |                  |   |        
|---------------------------- |  | ------------- | ------- | ---------------- | - | -------
|                             |  | March 31,2006 |         | December 31,2005
|Commitments to extend credit |  | $             | 893,400 |                  | $ | 832,866
|Standby letters of credit    |  |               | 106,782 |                  |   | 53,252 

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

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

Off-balance sheet arrangements also include an interest rate swap agreement and the Companys Trust Preferred Securities. The interest rate swap agreement has a
notional amount of $50.0 million in which the Company swapped the fixed rate to a floating rate. This swap is designated as a fair-value hedge that qualifies for the short-cut method of hedge accounting. The Companys credit
exposure on the interest rate swap is limited to its net favorable fair value, if any, and the interest payment receivable from the counterparty. Refer to the 2005 Form 10-K for information regarding the Trust Preferred Securities.

10.    REGULATORY MATTERS

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

To meet the capital adequacy requirements, Sterling Bancshares and the Bank must maintain minimum capital amounts
and ratios as defined in the regulations. Management believes, as of March 31, 2006 and December 31, 2005, that Sterling Bancshares and the Bank met all capital adequacy requirements to which they are subject.



16



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##### Table of Contents

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



|                                         |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|---------------------------------------- |  | ----------------------------------------- | ------- | ----- | ---------------------------- | - | ------ | ---------------------------------------------------------------------------- | ------- |  | --- | ------ |  | ----- | ------- |  | ---- | -
|                                         |  | Actual                                    |         |       | For CapitalAdequacy Purposes |   |        | To Be Categorized asWell Capitalized UnderPrompt CorrectiveAction
Provisions |        
|                                         |  | Amount                                    |         | Ratio |                              |   | Amount |                                                                              | Ratio   |  |     | Amount |  | Ratio |        
|                                         |  | (In thousands, except percentage amounts) |        
|CONSOLIDATED:                            |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|As of March 31, 2006:                    |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 418,420 |       | 12.3                         | % |        | $                                                                            | 272,400 |  | 8.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 341,220 |       | 10.0                         | % |        |                                                                              | 136,200 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 341,220 |       | 9.3                          | % |        |                                                                              | 146,812 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|                                         |  |                                           |         |       |                              |  
|As of December 31, 2005:                 |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 411,229 |       | 12.4                         | % |        | $                                                                            | 266,220 |  | 8.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 332,590 |       | 10.0                         | % |        |                                                                              | 133,110 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 332,590 |       | 9.1                          | % |        |                                                                              | 145,980 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|                                         |  |                                           |         |       |                              |  
|STERLING BANK:                           |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|As of March 31, 2006:                    |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 411,936 |       | 12.1                         | % |        | $                                                                            | 271,942 |  | 8.0 | %      |  | $     | 339,928 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 334,736 |       | 9.8                          | % |        |                                                                              | 135,971 |  | 4.0 | %      |  |       | 203,957 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 334,736 |       | 9.1                          | % |        |                                                                              | 146,579 |  | 4.0 | %      |  |       | 183,223 |  | 5.0  | %
|                                         |  |                                           |         |       |                              |  
|As of December 31, 2005:                 |  |                                           |         |       |                              |   |        |                                                                              |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 406,444 |       | 12.2                         | % |        | $                                                                            | 265,767 |  | 8.0 | %      |  | $     | 332,209 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 327,804 |       | 9.9                          | % |        |                                                                              | 132,884 |  | 4.0 | %      |  |       | 199,326 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 327,804 |       | 9.0                          | % |        |                                                                              | 145,709 |  | 4.0 | %      |  |       | 182,137 |  | 5.0  | %

On January 1, 2004 the Company deconsolidated the outstanding trust preferred securities from its
Consolidated Financial Statements. However, trust preferred securities are still considered in calculating the Companys Tier 1 capital ratios as permitted by the Federal Reserve rules. These rules, when fully transitioned and applicable on
March 31, 2009, will limit the aggregate amount of trust preferred securities and certain other capital elements to 25% of Tier 1 capital, net of goodwill. At March 31, 2006 approximately $65.3 million of the $82.5 million of trust
preferred securities outstanding would count as Tier 1 capital. The excess amount of trust preferred securities not qualifying for Tier 1 capital may be included in Tier 2 capital. This amount is limited to 50% of Tier 1 capital. Additionally, the
final rules provide that trust preferred securities no longer qualify for Tier 1 capital within 5 years of their maturity. Under the final transitioned rules, there would not be a material impact on the Companys consolidated capital ratios at
March 31, 2006.

Dividend restrictions  Dividends paid by Sterling Bank are subject to certain restrictions imposed by regulatory
agencies. Under these restrictions there was an aggregate of approximately $140 million available for payment of dividends at March 31, 2006 by the Bank. At March 31, 2006, the aggregate amount of dividends, which legally could be paid
without prior approval of various regulatory agencies, totaled approximately $72 million by the Bank.

11.    SUBSEQUENT EVENT

On May 8, 2006, Sterling Bancshares Capital Trust III (the Trust), a subsidiary of the Company, redeemed all 1.2 million of its
9.20% Cumulative Trust Preferred Securities (Nasdaq: SBIBO) and all 35,567 of its 9.20%



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##### Table of Contents

Common Securities at a redemption price equal to the $25.00 liquidation amount of each security, plus all accrued and unpaid distributions per security to
the Redemption Date.

The Trust took such action in connection with the concurrent prepayment by the Company of all of its $29.6 million 9.20% Junior
Subordinated Deferrable Interest Debentures (the Debentures) due March 21, 2031 which were held exclusively by the Trust. The Debentures were prepaid on the Redemption Date at a prepayment price equal to the principal outstanding
amount of the Debentures plus accrued and unpaid interest to the Redemption Date.



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

FORWARD-LOOKING STATEMENTS

This report, other periodic reports filed by us under the Exchange Act, and other written
or oral statements made by or on behalf of the Company contain certain statements relating to future events and our future results which constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These
forward-looking statements are typically identified by words such as expects, anticipates, intends, plans, believes, seeks, estimates, or words of
similar meaning, or future or conditional verbs such as should, could, or may.

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



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



| |  |  | changes in market rates and prices may adversely impact the value of securities, loans, deposits and other financial instruments and the interest rate sensitivity of our balance
sheet;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | competitive factors among financial services organizations, including product and pricing pressures and our ability to attract, develop and retain qualified banking professionals;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effect of changes in accounting policies and practices, as may be adopted by the Financial Accounting Standards Board, the Securities and Exchange Commission, the Public Company
Accounting Oversight Board and other regulatory agencies; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

Forward-looking statements speak only as of the date of this report. We do not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of this report or to reflect
the occurrence of unanticipated events.

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, 2005, filed with the Securities and Exchange Commission.



18



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##### Table of Contents

OVERVIEW

For more
than 31 years, Sterling Bancshares, Inc. and Sterling Bank have served the banking needs of small to mid-sized businesses. We provide a broad array of financial services to Texas businesses and consumers through 40 banking offices in the greater
metropolitan areas of Houston, San Antonio and Dallas, Texas. These cities are the 4th, 8thand 9thlargest, respectively, in the United States based on population according to the U.S. Census Bureau. On September 30, 2005, the Company completed its acquisition of Dallas, Texas-based Prestonwood Bancshares, Inc. and its
subsidiary, The Oaks Bank & Trust Company (The Oaks Bank). The results of operations for this acquisition were included in the Companys financial results beginning in the fourth quarter of 2005.

We continue to see significant opportunities for growth in all three of the markets in which we operate. For 2006, we expect to generate loan growth in the low to
mid-teen percentages and deposit growth in the mid to high single-digit percentages. We experienced very good deposit generation in the first quarter of 2006. Total deposits increased $122 million to $3.0 billion at March 31, 2006, up 4.3% over
December 31, 2005. Total loans were up $312 million or 12.7% in the past twelve months.

On an annualized basis, we expect to have net charge-offs to
average loans in the 30 to 40 basis point range, while reducing our nonperforming loan ratio over the long term. Net charge-offs for the first quarter of 2006 were 24 basis points annualized of average total loans.

We reported net income of $10.0 million for the first quarter ended March 31, 2006, a 29% increase compared to $7.8 million reported for the first quarter of 2005.
First quarter earnings were $0.22 per diluted share, up from $0.17 per diluted share for the same quarter of 2005.

In the first quarter of 2006, we
continued to invest in our Companys future growth consistent with our strategic plan. As part of this strategy, during the first quarter of 2006 we added new technologies, new products for our customers and key banking professionals having
broad banking and product knowledge.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make a number of judgments, estimates and assumptions that
affect the reported amount of assets, liabilities, income and expenses in our Consolidated Financial Statements and accompanying notes. We believe that the judgments, estimates and assumptions used in the preparation of our Consolidated Financial
Statements are appropriate given the factual circumstances as of March 31, 2006.

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 2005 Annual Report on Form 10-K in the Critical Accounting Policies section of Managements Discussion and Analysis and in Note 1 to the Consolidated Financial Statements  Organization and
Summary of Significant Accounting and Reporting Policies.



19



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##### Table of Contents

RECENT ACCOUNTING STANDARDS

Statement of Accounting StandardsNo. 123R, Share-Based Payment (Revised 2004) (SFAS 123R) established standards for accounting for 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. SFAS 123R eliminated the
ability to account for stock-based compensation using the intrinsic value-based method of accounting, and requires that such transactions be recognized as compensation expense in the income statement based on their fair values on the date of grant.
SFAS 123R applies to new awards and to awards modified, repurchased, or cancelled after January 1, 2006. Additionally, compensation expense for the portion of awards for which the requisite service has not been rendered (generally
referring to non-vested awards) that are outstanding as of January 1, 2006 will be recognized over the remaining vesting period. The Company used the modified prospective application in implementing SFAS 123R. Beginning in 2006, the
Companys results of operations reflect compensation expense for all employee stock-based compensation, including the unvested portion of stock options granted prior to 2006. Prior to 2006, the Company accounted for stock-based employee
compensation using the intrinsic value-based method of accounting, as permitted. Under the intrinsic value-based method of accounting, no compensation expense was recognized for the Companys incentive stock options or for the Companys
employee stock purchase plan. The adoption of this accounting standard resulted in additional stock-based compensation expense of $107 thousand for the three month period ended March 31, 2006 attributable to stock options and the Companys
employee stock purchase plan. There was no income tax benefit recorded for this additional stock-based compensation expense. The adoption of this accounting standard did not have a meaningful impact on earnings per share for the same time period.

In February 2006, the Financial Accounting Standard Board (FASB) issued Statement of Accounting Standards No. 155 (SFAS 155)
Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140. It establishes, among other things, the accounting for certain derivatives embedded in other financial instruments. The primary
objective of this Statement with respect to FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, is to simplify accounting for any hybrid financial instrument that contains an embedded derivative that
would otherwise require bifurcation. The primary objective of this Statement with respect to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, is to eliminate a
restriction on the passive derivative instruments that a qualifying special-purpose entity (QSPE) may hold. This statement is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that
begins after September 15, 2006. The adoption of this accounting standard is not expected to have a material impact on the Companys financial statements.

In March 2006, the FASB issued Statement of Accounting Standards No. 156 (SFAS 156) Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140. It establishes,
among other things, the accounting for all separately recognized servicing assets and servicing liabilities. This Statement amends Statement 140 to require that all separately recognized servicing assets and servicing liabilities be initially
measured at fair value, if practicable. This statement is effective for fiscal years beginning after September 15, 2006. The adoption of this accounting standard is not expected to have a material impact on the Companys financial
statements.



20



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##### Table of Contents

SELECTED FINANCIAL DATA



|                                                               |  |                                                                |           |   |                        |   |           |      |  |   |           |  
|-------------------------------------------------------------- |  | -------------------------------------------------------------- | --------- | - | ---------------------- | - | --------- | ---- |  | - | --------- | -
|                                                               |  | Three Months EndedMarch 31,                                    |           |   | Year EndedDecember 31, |  
|                                                               |  | 2006                                                           |           |   | 2005                   |   |           | 2005 | 
|                                                               |  | (Dollars and shares in thousands, exceptfor per share amounts) |          
|INCOME STATEMENT DATA:                                         |  |                                                                |           |  
|Net interest income                                            |  | $                                                              | 40,692    |   |                        | $ | 34,793    |      |  | $ | 150,230   |  
|Provision for credit losses                                    |  |                                                                | 1,326     |   |                        |   | 3,340     |      |  |   | 14,371    |  
|Noninterest income                                             |  |                                                                | 6,490     |   |                        |   | 6,777     |      |  |   | 26,959    |  
|Noninterest expense                                            |  |                                                                | 30,958    |   |                        |   | 26,916    |      |  |   | 110,646   |  
|Income before income taxes                                     |  |                                                                | 14,898    |   |                        |   | 11,314    |      |  |   | 52,172    |  
|Net income                                                     |  |                                                                | 10,032    |   |                        |   | 7,758     |      |  |   | 36,222    |  
|BALANCE SHEET DATA(at period-end):                             |  |                                                                |           |   |                        |   |           |      |  |   |           |  
|Total assets                                                   |  | $                                                              | 3,745,578 |   |                        | $ | 3,445,389 |      |  | $ | 3,726,859 |  
|Total loans                                                    |  |                                                                | 2,758,728 |   |                        |   | 2,447,037 |      |  |   | 2,699,362 |  
|Allowance for loan losses                                      |  |                                                                | 31,116    |   |                        |   | 30,760    |      |  |   | 31,230    |  
|Total securities                                               |  |                                                                | 612,718   |   |                        |   | 673,758   |      |  |   | 618,998   |  
|Trading assets                                                 |  |                                                                | 16,615    |   |                        |   | 13,639    |      |  |   | 28,515    |  
|Total deposits                                                 |  |                                                                | 2,959,980 |   |                        |   | 2,493,863 |      |  |   | 2,838,143 |  
|Short-term borrowings                                          |  |                                                                | 280,875   |   |                        |   | 476,315   |      |  |   | 392,850   |  
|Subordinated debt                                              |  |                                                                | 45,110    |   |                        |   | 46,027    |      |  |   | 46,238    |  
|Junior subordinated debt                                       |  |                                                                | 82,475    |   |                        |   | 82,475    |      |  |   | 82,475    |  
|Shareholders equity                                           |  |                                                                | 340,281   |   |                        |   | 314,908   |      |  |   | 334,472   |  
|COMMON SHARE DATA:                                             |  |                                                                |           |   |                        |   |           |      |  |   |           |  
|Earnings per share (1)                                         |  |                                                                |           |   |                        |   |           |      |  |   |           |  
|Basic                                                          |  | $                                                              | 0.22      |   |                        | $ | 0.17      |      |  | $ | 0.80      |  
|Diluted                                                        |  |                                                                | 0.22      |   |                        |   | 0.17      |      |  |   | 0.79      |  
|Shares used in computing earnings per common share             |  |                                                                |           |   |                        |   |           |      |  |   |           |  
|Basic                                                          |  |                                                                | 45,333    |   |                        |   | 45,131    |      |  |   | 45,288    |  
|Diluted                                                        |  |                                                                | 45,794    |   |                        |   | 45,597    |      |  |   | 45,761    |  
|End of period common shares outstanding                        |  |                                                                | 45,445    |   |                        |   | 45,217    |      |  |   | 45,334    |  
|Book value per common share at period-end                      |  |                                                                |           |   |                        |   |           |      |  |   |           |  
|Total                                                          |  | $                                                              | 7.49      |   |                        | $ | 6.96      |      |  | $ | 7.38      |  
|Tangible                                                       |  |                                                                | 5.54      |   |                        |   | 5.54      |      |  |   | 5.42      |  
|Cash dividends paid per common share                           |  |                                                                | 0.070     |   |                        |   | 0.060     |      |  |   | 0.240     |  
|Common stock dividend payout ratio                             |  |                                                                | 31.58     | % |                        |   | 34.89     | %    |  |   | 30.00     | %
|SELECTED PERFORMANCE RATIOS AND OTHER DATA:                    |  |                                                                |           |   |                        |   |           |      |  |   |           |  
|Return on average common equity (2)                            |  |                                                                | 11.96     | % |                        |   | 9.88      | %    |  |   | 11.07     | %
|Return on average assets (2)                                   |  |                                                                | 1.09      | % |                        |   | 0.93      | %    |  |   | 1.02      | %
|Net interest margin                                            |  |                                                                | 4.88      | % |                        |   | 4.59      | %    |  |   | 4.63      | %
|Efficiency ratio                                               |  |                                                                | 65.61     | % |                        |   | 65.75     | %    |  |   | 62.44     | %
|Full-time equivalent employees                                 |  |                                                                | 1,013     |   |                        |   | 962       |      |  |   | 1,014     |  
|Number of banking offices                                      |  |                                                                | 40        |   |                        |   | 36        |      |  |   | 40        |  
|LIQUIDITY AND CAPITAL RATIOS:                                  |  |                                                                |           |   |                        |   |           |      |  |   |           |  
|Average loans to average deposits                              |  |                                                                | 95.93     | % |                        |   | 96.25     | %    |  |   | 97.67     | %
|Period-end shareholders equity to total assets                |  |                                                                | 9.08      | % |                        |   | 9.14      | %    |  |   | 8.97      | %
|Average shareholders equity to average assets                 |  |                                                                | 9.12      | % |                        |   | 9.41      | %    |  |   | 9.19      | %
|Period-end tangible capital to total tangible assets           |  |                                                                | 6.89      | % |                        |   | 7.41      | %    |  |   | 6.76      | %
|Tier 1 capital to risk-weighted assets                         |  |                                                                | 10.02     | % |                        |   | 11.37     | %    |  |   | 9.99      | %
|Total capital to risk-weighted assets                          |  |                                                                | 12.29     | % |                        |   | 14.00     | %    |  |   | 12.36     | %
|Tier 1 leverage ratio (Tier 1 capital to average assets)       |  |                                                                | 9.30      | % |                        |   | 10.09     | %    |  |   | 9.11      | %
|ASSET QUALITY RATIOS:                                          |  |                                                                |           |   |                        |   |           |      |  |   |           |  
|Period-end allowance for credit losses to period-end loans     |  |                                                                | 1.16      | % |                        |   | 1.29      | %    |  |   | 1.20      | %
|Period-end allowance for loan losses to period-end loans       |  |                                                                | 1.13      | % |                        |   | 1.26      | %    |  |   | 1.16      | %
|Period-end allowance for loan losses to nonperforming loans    |  |                                                                | 161.90    | % |                        |   | 172.23    | %    |  |   | 142.99    | %
|Nonperforming assets to period-end loans and foreclosed assets |  |                                                                | 0.81      | % |                        |   | 0.78      | %    |  |   | 0.83      | %
|Nonperforming loans to period-end loans                        |  |                                                                | 0.70      | % |                        |   | 0.73      | %    |  |   | 0.81      | %
|Nonperforming assets to period-end assets                      |  |                                                                | 0.60      | % |                        |   | 0.55      | %    |  |   | 0.60      | %
|Net charge-offs to average loans (2)                           |  |                                                                | 0.24      | % |                        |   | 0.34      | %    |  |   | 0.51      | %

---

|(1) | The calculation of diluted EPS excludes 85,800 and 98,421 options for the three months ended March 31, 2006 and 2005 and 111,775 options for the year ended December 31,
2005, which were antidilutive.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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RESULTS OF OPERATIONS

Net Income  Net income was $10.0 million for the quarter ended March 31, 2006, a 29% increase compared to $7.8 million reported for the first quarter of 2005. Earnings were $0.22 per diluted share in 2006s
first quarter, up from $0.17 per diluted share for the first quarter of 2005.

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

Net Interest Income  Net interest income represents the amount by which interest income
on interest-earning assets, including loans and securities, exceeds interest paid on interest-bearing liabilities, including deposits and borrowings. Net interest income is our principal source of earnings. Interest rate fluctuations, as well as
changes in the amount and type of earning assets and liabilities, combine to affect net interest income.

The Federal Reserve Board significantly
influences market interest rates, including rates offered for loans and deposits by many financial institutions. Generally, when the Federal Reserve Board changes the target overnight interest rate charged by banks, the market responds with a
similar change in the prime lending rate. Our loan portfolio is impacted significantly by changes in short-term interest rates. In 2003, overnight interest rates were 1.00%. Beginning in June 2004, the Federal Reserve Board increased overnight
interest rates by 375 basis points to 4.75% at March 31, 2006. Our net interest margin has continued to benefit from these gradual increases in short-term interest rates. In contrast, long-term interest rates, which are impacted by various
forces including national and world-wide economies and political and monetary policies, have not increased by the same amount. At March 31, 2006, the market yield on 10-year U.S. Treasury notes was 4.86% compared with 4.50% at March 31,
2005. This has resulted in a general flattening of the interest rate yield curve. Since our balance sheet is asset sensitive, our interest-earning assets generally reprice more quickly than our interest-bearing liabilities. However, in the current
interest rate environment, the benefit of the Companys traditionally asset-sensitive position has been negatively impacted.

Net interest income was
$40.7 million for the three month period ended March 31, 2006, an increase of $5.9 million or 17.0% compared to the same period in 2005. Our net interest margin was 4.88% and 4.59% for the three month periods ended March 31, 2006 and 2005,
respectively. Overall, our net interest income and net interest margin were higher during the 2006 period, as compared with 2005 due in large part to higher deposit balances that were used to fund interest-earning asset growth and reduce short-term
borrowings. The expansion of the net interest margin has been partially offset by a flatter interest rate yield curve and higher rates paid on borrowings and deposits. Changes in the mix of interest-earning assets and liabilities also influence our
net interest income and net interest margin. Details of the changes of the various components of net interest income and net interest margin are discussed below.

Average interest-earning assets for the three month period ended March 31, 2006 increased $306.9 million or 10.0% compared to the same period in 2005. The average yield earned on interest-earning assets increased 99 basis points for
the same time frame. The increase in interest earning assets was due primarily to an increase in average loans held for investment of $359.6 million or 15.2% for the three months ended March 31, 2006 over the comparable period in 2005. The
increase in average loans held for investment and increases in short-term interest rates contributed to the $12.8 million increase in interest income on loans held for investment for this same time frame. The size of the loan portfolio during 2006
as a percentage of average interest-earning assets increased from 77% for the first three months of 2005 to 81% for the same period in 2006.

On average,
the securities portfolio (including trading assets) was lower by $53.9 million or 7.8% for the three month period ended March 31, 2006 compared to the same period in 2005. Faced with a flat yield curve and a growing loan portfolio, we decreased
the securities portfolio as a percentage of interest-earning assets through a combination of scheduled maturities, paydowns and sales of securities beginning in 2005. Interest income earned on the securities portfolio remained flat for the three
month period ended March 31, 2006 compared to the same



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##### Table of Contents

time period in 2005. The average yield earned on the securities portfolio increased 31 basis points during this time period, which offset the decrease in the
average securities portfolio.

Average interest-bearing liabilities for the three month period ended March 31, 2006 increased $194.0 million or 8.9%
compared to the same period in 2005. The average rate paid on interest-bearing liabilities increased 103 basis points for the same time frame. The increase in interest-bearing liabilities was primarily due to an increase in average interest-bearing
deposits and certificates of deposit of $39.6 million and $215.6 million, respectively for the three month period ended March 31, 2006 compared to the same period in 2005. The average rate paid on deposits increased 93 basis points for the same
time period due primarily to increases in interest rates offered on deposit products. The increase in average deposit balances and rate paid resulted in additional interest expense of $5.1 million for the three month period ended March 31, 2006
compared to the same period in 2005.

Average short-term borrowings for the three month period ended March 31, 2006 decreased $60.1 million or 13.8%
compared to the same period in 2005. This decrease in average short-term borrowings was due to increases in both average interest-bearing and noninterest-bearing deposits. The average rate paid on short-term borrowings increased 198 basis points for
the same time frame resulting in an increase in interest expense of $1.5 million.



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##### Table of Contents

Certain average balances, together with the total dollar amounts of interest income and expense and the average interest
yields/rates are included below. No tax equivalent adjustments were made (dollars in thousands).



|                                           |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|------------------------------------------ |  | ---------------------------- | --------- | - | -------- | - | ----------------- |  | ---- | -------------- |  | - | --------- | - | ----------------- | - | ------ |  | ---- | -
|                                           |  | Three Months Ended March 31, |          
|                                           |  | (Dollars in thousands)       |          
|                                           |  | 2006                         |           |   | 2005     |  
|                                           |  | AverageBalance               |           |   | Interest |   | AverageYield/Rate |  |      | AverageBalance |  |   | Interest  |   | AverageYield/Rate |  
|Interest-earning assets:                   |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Loans held for sale (1)                    |  | $                            | 7,541     |   |          | $ | 159               |  | 8.55 | %              |  | $ | 8,150     |   |                   | $ | 146    |  | 7.28 | %
|Loans held for investment (1):             |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Taxable                                    |  |                              | 2,727,432 |   |          |   | 50,577            |  | 7.52 | %              |  |   | 2,367,303 |   |                   |   | 37,780 |  | 6.47 | %
|Non-taxable                                |  |                              | 2,520     |   |          |   | 40                |  | 6.36 | %              |  |   | 3,086     |   |                   |   | 65     |  | 8.55 | %
|Securities:                                |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Taxable                                    |  |                              | 557,302   |   |          |   | 6,149             |  | 4.47 | %              |  |   | 597,949   |   |                   |   | 6,155  |  | 4.17 | %
|Non-taxable                                |  |                              | 60,747    |   |          |   | 587               |  | 3.92 | %              |  |   | 64,967    |   |                   |   | 628    |  | 3.92 | %
|Trading assets                             |  |                              | 18,770    |   |          |   | 300               |  | 6.48 | %              |  |   | 27,786    |   |                   |   | 312    |  | 4.56 | %
|Federal funds sold                         |  |                              | 4,040     |   |          |   | 42                |  | 4.21 | %              |  |   | 6,274     |   |                   |   | 37     |  | 2.42 | %
|Deposits in financial institutions         |  |                              | 5,331     |   |          |   | 58                |  | 4.38 | %              |  |   | 1,220     |   |                   |   | 9      |  | 3.05 | %
|                                           |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total interest-earning assets              |  |                              | 3,383,683 |   |          |   | 57,912            |  | 6.94 | %              |  |   | 3,076,735 |   |                   |   | 45,132 |  | 5.95 | %
|                                           |  |                              |           |   |          |  
|Noninterest-earning assets:                |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Cash and due from banks                    |  |                              | 113,040   |   |          |   |                   |  |      |                |  |   | 102,316   |   |                   |   |        |  |      |  
|Premises and equipment, net                |  |                              | 40,879    |   |          |   |                   |  |      |                |  |   | 39,905    |   |                   |   |        |  |      |  
|Other assets                               |  |                              | 225,628   |   |          |   |                   |  |      |                |  |   | 196,223   |   |                   |   |        |  |      |  
|Allowance for loan losses                  |  |                              | (31,204   | ) |          |   |                   |  |      |                |  |   | (30,499   | ) |                   |   |        |  |      |  
|                                           |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total noninterest-earning assets           |  |                              | 348,343   |   |          |   |                   |  |      |                |  |   | 307,945   |   |                   |   |        |  |      |  
|                                           |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total assets                               |  | $                            | 3,732,026 |   |          |   |                   |  |      |                |  | $ | 3,384,680 |   |                   |   |        |  |      |  
|                                           |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|                                           |  |                              |           |   |          |  
|Interest bearing liabilities:              |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Deposits:                                  |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Demand and savings                         |  | $                            | 1,048,948 |   |          | $ | 3,077             |  | 1.19 | %              |  | $ | 1,009,359 |   |                   | $ | 1,774  |  | 0.71 | %
|Certificates and other time                |  |                              | 807,477   |   |          |   | 7,134             |  | 3.58 | %              |  |   | 591,830   |   |                   |   | 3,372  |  | 2.31 | %
|Short-term borrowings                      |  |                              | 377,349   |   |          |   | 4,162             |  | 4.47 | %              |  |   | 437,547   |   |                   |   | 2,690  |  | 2.49 | %
|Subordinated debt                          |  |                              | 46,021    |   |          |   | 1,055             |  | 9.30 | %              |  |   | 47,056    |   |                   |   | 813    |  | 7.00 | %
|Junior subordinated debt                   |  |                              | 82,475    |   |          |   | 1,792             |  | 8.81 | %              |  |   | 82,475    |   |                   |   | 1,690  |  | 8.31 | %
|                                           |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total interest-bearing liabilities         |  |                              | 2,362,270 |   |          |   | 17,220            |  | 2.96 | %              |  |   | 2,168,267 |   |                   |   | 10,339 |  | 1.93 | %
|Noninterest-bearing sources:               |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Demand deposits                            |  |                              | 997,237   |   |          |   |                   |  |      |                |  |   | 870,059   |   |                   |   |        |  |      |  
|Other liabilities                          |  |                              | 32,339    |   |          |   |                   |  |      |                |  |   | 27,996    |   |                   |   |        |  |      |  
|                                           |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total noninterest-bearing liabilities      |  |                              | 1,029,576 |   |          |   |                   |  |      |                |  |   | 898,055   |   |                   |   |        |  |      |  
|Shareholders equity                       |  |                              | 340,180   |   |          |   |                   |  |      |                |  |   | 318,358   |   |                   |   |        |  |      |  
|                                           |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Total liabilities and shareholders equity |  | $                            | 3,732,026 |   |          |   |                   |  |      |                |  | $ | 3,384,680 |   |                   |   |        |  |      |  
|                                           |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  
|Net interest income & margin               |  |                              |           |   |          | $ | 40,692            |  | 4.88 | %              |  |   |           |   |                   | $ | 34,793 |  | 4.59 | %
|                                           |  |                              |           |   |          |   |                   |  |      |                |  |   |           |   |                   |   |        |  |      |  

---

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



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##### Table of Contents

Noninterest Income  Noninterest income for the three months ended March 31, 2006 and 2005,
respectively, is summarized as follows (in thousands):



|                                   |  |                            |       |   |               |   |      
|---------------------------------- |  | -------------------------- | ----- | - | ------------- | - | -----
|                                   |  | For the Three Months Ended
|                                   |  | March 31,2006              |       |   | March 31,2005
|Customer service fees              |  | $                          | 2,577 |   |               | $ | 2,992
|Net gain (loss) on trading assets  |  |                            | (135  | ) |               |   | 109  
|Net gain on the sale of securities |  |                            |      |   |               |   | 85   
|Net gain on the sale of loans      |  |                            | 305   |   |               |   | 257  
|Bank owned life insurance          |  |                            | 678   |   |               |   | 710  
|Debit card income                  |  |                            | 465   |   |               |   | 416  
|Other                              |  |                            | 2,600 |   |               |   | 2,208
|                                   |  |                            |       |   |               |   |      
|                                   |  | $                          | 6,490 |   |               | $ | 6,777
|                                   |  |                            |       |   |               |   |      

Customer service fees for the three months ended March 31, 2006 decreased $415 thousand compared to the same
period in 2005. This decrease was due in part to a higher earnings credit rate on certain commercial accounts, lower insufficient fund fees, and increased fee waivers due to increased competition for deposits.

Net losses on trading assets for the three months ended March 31, 2006 compared to the gains on trading assets for the same period in 2005 were attributable to a
decrease in trading activity and the market conditions for these types of assets compared to the same period in 2005. Trading assets are carried at fair market value in our consolidated balance sheets.

Net gains on the sale of loans increased slightly for the three month period ended March 31, 2006 compared to the same period in 2005. The increase was due
primarily to an increase in the volume of loan sales.

Other noninterest income increased $392 thousand for the three months ended March 31, 2006
compared to the same period in 2005. No single component of other noninterest income made up a significant portion of the change from the first quarter of 2005.

Noninterest Expense  Noninterest expense for the three months ended March 31, 2006 and 2005, respectively, is summarized as follows (in thousands):



|                                                                           |  |                            |        |               |   |       
|-------------------------------------------------------------------------- |  | -------------------------- | ------ | ------------- | - | ------
|                                                                           |  | For the Three Months Ended
|                                                                           |  | March 31,2006              |        | March 31,2005
|Salaries and employee benefits                                             |  | $                          | 18,675 |               | $ | 15,394
|Occupancy expense                                                          |  |                            | 3,843  |               |   | 3,642 
|Technology                                                                 |  |                            | 1,474  |               |   | 1,214 
|Professional fees                                                          |  |                            | 1,425  |               |   | 1,296 
|Postage, delivery and supplies                                             |  |                            | 790    |               |   | 750   
|Marketing                                                                  |  |                            | 384    |               |   | 645   
|Core deposit intangibles amortization                                      |  |                            | 194    |               |   | 112   
|Net losses and carrying costs of other real estate and foreclosed property |  |                            | 19     |               |   | 56    
|Other                                                                      |  |                            | 4,154  |               |   | 3,807 
|                                                                           |  |                            |        |               |   |       
|                                                                           |  | $                          | 30,958 |               | $ | 26,916
|                                                                           |  |                            |        |               |   |       



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Salaries and employee benefits for the three month period ended March 31, 2006 increased $3.3 million compared to
the same period in 2005. The Company added 51 full-time equivalent employees during the same time period, principally related to new office additions and to support growth. During the first quarter of 2006, the Company added experienced key officers
to further implement its growth strategy.

Increases in most categories of noninterest expense in the first quarter of 2006 as compared with 2005s
first quarter were attributable principally to the addition of four banking offices from the acquisition of The Oaks Bank on September 30, 2005. Professional fees increased $129 thousand for the three months ended March 31, 2006 compared
to the same period in 2005. This increase was due primarily to an increase in consulting fees related to Sarbanes-Oxley compliance. Marketing expense decreased $261 thousand for the three month period ended March 31, 2006 compared to the same
period of 2005. This decrease was due to additional marketing efforts during 2005 through television, print and radio advertising.

Other noninterest
expense was $4.2 million for the three months ended March 31, 2006, up $347 thousand or 9.1% compared with the same period in 2005. This was primarily due to an increase in charitable contributions over the prior period.

Income Taxes  We provided $4.9 million for federal and state income taxes during the three month period ended March 31, 2006 and $3.6 million
for the same period of 2005. The effective tax rate for the three month period in 2006 was approximately 33% and was approximately 31% for the same period in 2005.

FINANCIAL CONDITION

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



|                                |  |                |           |   |                   |   |        |   |           |  |       |  
|------------------------------- |  | -------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                |  | March 31, 2006 |           |   | December 31, 2005 |  
|                                |  | Amount         |           | % |                   |   | Amount |   | %         | 
|Commercial and industrial       |  | $              | 751,993   |   | 27.3              | % |        | $ | 738,061   |  | 27.4  | %
|Real estate:                    |  |                |           |   |                   |   |        |   |           |  |       |  
|Commercial                      |  |                | 1,263,753 |   | 45.9              | % |        |   | 1,221,610 |  | 45.4  | %
|Construction                    |  |                | 454,987   |   | 16.5              | % |        |   | 438,454   |  | 16.3  | %
|Residential mortgage            |  |                | 178,423   |   | 6.5               | % |        |   | 190,701   |  | 7.1   | %
|Consumer/other                  |  |                | 70,673    |   | 2.6               | % |        |   | 72,937    |  | 2.7   | %
|Foreign loans                   |  |                | 31,975    |   | 1.2               | % |        |   | 29,245    |  | 1.1   | %
|                                |  |                |           |   |                   |   |        |   |           |  |       |  
|Total loans held for investment |  | $              | 2,751,804 |   | 100.0             | % |        | $ | 2,691,008 |  | 100.0 | %
|                                |  |                |           |   |                   |   |        |   |           |  |       |  

At March 31, 2006, loans held for investment were $2.8 billion, an increase of $60.8 million or 2.3% over
loans held for investment at December 31, 2005. This increase was primarily due to internal loan growth. We have experienced good growth in the commercial and industrial, commercial real estate and construction lending portfolios during 2006.

Our primary lending focus is commercial loans and owner-occupied real estate loans to businesses with annual sales ranging from $300 thousand to $30
million. At March 31, 2006, commercial and industrial loans and commercial real estate loans were 27.3% and 45.9%, respectively of loans held for investment.

At March 31, 2006, loans held for investment were 93.0% of deposits and 73.5% of total assets. As of March 31, 2006, we had no material concentrations of loans.



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##### Table of Contents

Loans Held for Sale  Loans held for sale totaled were $6.9 million at March 31, 2006, as
compared with $8.4 million at December 31, 2005. Loans held for sale includes the guaranteed portion of SBA loans originated by the Bank. Due to the timing of the sales of SBA loans to investors, the balance of loans in the held for sale
category at any given time may vary.

Trading Assets  Trading assets decreased $11.9 million or 41.7% during the first quarter of 2006
compared to December 31, 2005. During 2006, we lowered our holdings of these assets in response to current market conditions.

Securities  The Companys securities portfolio at March 31, 2006 totaled $612.7 million, as compared to $619.0 million at December 31, 2005, a decrease of $6.3 million or 1.0%. We have decreased the
securities portfolio as a percentage of interest earning assets through a combination of scheduled maturities, paydowns and sales of securities.

Net
unrealized losses on the available-for-sale securities were $14.8 million at March 31, 2006 as compared to $10.7 million at December 31, 2005. Net unrealized losses on our securities portfolio have been caused primarily by interest rate
increases. We do not consider these investments to be other-than-temporarily impaired at March 31, 2006.

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



|                                     |  |                |           |   |                   |   |        |   |           |  |       |  
|------------------------------------ |  | -------------- | --------- | - | ----------------- | - | ------ | - | --------- |  | ----- | -
|                                     |  | March 30, 2006 |           |   | December 31, 2005 |  
|                                     |  | Amount         |           | % |                   |   | Amount |   | %         | 
|Noninterest-bearing demand           |  | $              | 1,031,989 |   | 34.9              | % |        | $ | 1,045,937 |  | 36.8  | %
|Interest-bearing demand              |  |                | 1,083,486 |   | 36.6              | % |        |   | 1,017,832 |  | 35.9  | %
|Certificates and other time deposits |  |                |           |   |                   |   |        |   |           |  |       |  
|Jumbo                                |  |                | 522,262   |   | 17.6              | % |        |   | 467,672   |  | 16.5  | %
|Regular                              |  |                | 219,605   |   | 7.4               | % |        |   | 216,585   |  | 7.6   | %
|Brokered                             |  |                | 102,638   |   | 3.5               | % |        |   | 90,117    |  | 3.2   | %
|                                     |  |                |           |   |                   |   |        |   |           |  |       |  
|Total deposits                       |  | $              | 2,959,980 |   | 100.0             | % |        | $ | 2,838,143 |  | 100.0 | %
|                                     |  |                |           |   |                   |   |        |   |           |  |       |  

Total deposits as of March 31, 2006 increased $121.8 million to $3.0 billion, up 4.3% compared to $2.8
billion at December 31, 2005. The deposit growth we experienced during the first three months of 2006 was driven primarily by interest-bearing and time deposits. The percentage of noninterest-bearing deposits to total deposits as of
March 31, 2006 was 34.9%.

Short-term borrowings  As of March 31, 2006, we had $280.9 million in short-term borrowings
compared to $392.9 million at December 31, 2005, a decrease of $112.0 million or 28.5%. The Companys primary source of short-term borrowings is the Federal Home Loan Bank. At March 31, 2006, borrowings under FHLB advances totaled
$253 million and had maturities less than 30 days. The average interest rate on these borrowings was 4.68% at March 31, 2006. The Company utilizes these borrowings to meet liquidity needs. Maturing advances are replaced by drawing on available
cash, making additional borrowings or through increased customer deposits.

ASSET QUALITY

Risk Elements  Our nonperforming and past-due loans are substantially collateralized by assets, with any excess of loan balances over collateral
values specifically allocated in the allowance for loan losses. On an ongoing basis we receive updated appraisals on loans secured by real estate, particularly those categorized as nonperforming loans and potential problem loans. In those instances
where updated appraisals reflect reduced collateral values, an evaluation of the borrowers overall financial condition is made to determine the need, if any, for possible write-downs or appropriate additions to the allowance for loan losses.



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



|                                                               |  |               |        |   |                  |   |        |  
|-------------------------------------------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | -
|                                                               |  | March 31,2006 |        |   | December 31,2005 |  
|Nonperforming and nonaccrual loans                             |  | $             | 19,220 |   |                  | $ | 21,841 |  
|Real estate acquired by foreclosure                            |  |               | 2,726  |   |                  |   | 460    |  
|Other repossessed assets                                       |  |               | 418    |   |                  |   | 137    |  
|                                                               |  |               |        |   |                  |   |        |  
|Total nonperforming assets                                     |  | $             | 22,364 |   |                  | $ | 22,438 |  
|                                                               |  |               |        |   |                  |   |        |  
|Potential problem loans                                        |  | $             | 47,517 |   |                  | $ | 58,011 |  
|                                                               |  |               |        |   |                  |   |        |  
|Accruing loans past due 90 days or more                        |  | $             | 3,254  |   |                  | $ | 162    |  
|                                                               |  |               |        |   |                  |   |        |  
|Period-end allowance for loan losses to nonperforming loans    |  |               | 161.90 | % |                  |   | 142.99 | %
|Nonperforming loans to period-end loans                        |  |               | 0.70   | % |                  |   | 0.81   | %
|Nonperforming assets to period-end assets                      |  |               | 0.60   | % |                  |   | 0.60   | %
|Nonperforming assets to period-end loans and foreclosed assets |  |               | 0.81   | % |                  |   | 0.83   | %

Nonperforming assets were $22.4 million at March 31, 2006, a slight decrease from December 31, 2005.
Accruing loans past due 90 days or more at March 31, 2006 totaled $3.3 million. Much of this increase in accruing loans past due 90 days can be attributed to two problem relationships totaling $3.1 million which are government guaranteed. We do
not expect to incur any significant losses from these credits.

Allowance for Credit Losses  The allowance for credit losses and the
related provision for credit losses are determined based on the historical credit loss experience, changes in the loan portfolio, including size, mix and risk of the individual loans, and current economic conditions. We monitor economic conditions
in our local market areas and the probable impact on borrowers, on past-due amounts, on related collateral values, on the number and size of the non-performing loans and on the resulting amount of charges-offs for the period.

The provision for credit losses for the three months ended March 31, 2006 was $1.3 million and as compared to $3.3 million for the same period in 2005. The lower
provision for credit losses during three months ended March 31, 2006 was due to a favorable improvement in net charge-offs for this same time period.

Net charge-offs were $1.6 million or 0.24% (annualized) of average loans for the three months ended March 31, 2006. Net charge-offs decreased $340 thousand for the three months ended March 31, 2006 compared to the same period in
2005.

The allowance for loan losses at March 31, 2006 was $31.1 million and represented 1.13% of total loans. The allowance for loan losses at
March 31, 2006 was 161.9% of nonperforming loans, up from 142.99% at December 31, 2005, principally because of improvements in asset quality. The reserve for unfunded lending commitments was $975 thousand at March 31, 2005 as compared
with $1.2 million at December 31, 2005.



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



|                                                                       |  |                             |        |   |      |   |        |  
|---------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                       |  | Three Months EndedMarch 31, |       
|                                                                       |  | 2006                        |        |   | 2005 |  
|Allowance for loan losses at beginning of period                       |  | $                           | 31,230 |   |      | $ | 29,406 |  
|Charge-offs:                                                           |  |                             |        |   |      |   |        |  
|Commercial, financial, and industrial                                  |  |                             | 1,028  |   |      |   | 1,339  |  
|Real estate, mortgage and construction                                 |  |                             | 1,005  |   |      |   | 511    |  
|Consumer                                                               |  |                             | 113    |   |      |   | 515    |  
|                                                                       |  |                             |        |   |      |   |        |  
|Total charge-offs                                                      |  |                             | 2,146  |   |      |   | 2,365  |  
|                                                                       |  |                             |        |   |      |   |        |  
|Recoveries                                                             |  |                             |        |   |      |   |        |  
|Commercial, financial, and industrial                                  |  |                             | 385    |   |      |   | 313    |  
|Real estate, mortgage and construction                                 |  |                             | 3      |   |      |   | 5      |  
|Consumer                                                               |  |                             | 120    |   |      |   | 69     |  
|                                                                       |  |                             |        |   |      |   |        |  
|Total recoveries                                                       |  |                             | 508    |   |      |   | 387    |  
|                                                                       |  |                             |        |   |      |   |        |  
|Net charge-offs                                                        |  |                             | 1,638  |   |      |   | 1,978  |  
|Provision for loan losses                                              |  |                             | 1,524  |   |      |   | 3,332  |  
|                                                                       |  |                             |        |   |      |   |        |  
|Allowance for loan losses at end of period                             |  |                             | 31,116 |   |      |   | 30,760 |  
|                                                                       |  |                             |        |   |      |   |        |  
|Reserve for losses on unfunded loan commitments at beginning of period |  |                             | 1,173  |   |      |   | 826    |  
|Provision for losses on unfunded loan commitments                      |  |                             | (198   | ) |      |   | 8      |  
|                                                                       |  |                             |        |   |      |   |        |  
|Reserve for losses on unfunded loan commitments at end of period       |  |                             | 975    |   |      |   | 834    |  
|                                                                       |  |                             |        |   |      |   |        |  
|Total allowance for credit losses                                      |  | $                           | 32,091 |   |      | $ | 31,594 |  
|                                                                       |  |                             |        |   |      |   |        |  
|Period-end allowance for credit losses to period-end loans             |  |                             | 1.16   | % |      |   | 1.29   | %
|Period-end allowance for loan losses to period-end loans               |  |                             | 1.13   | % |      |   | 1.26   | %
|Period-end allowance for loan losses to nonperforming loans            |  |                             | 161.90 | % |      |   | 172.23 | %
|Nonperforming assets to period-end loans and foreclosed assets         |  |                             | 0.81   | % |      |   | 0.78   | %
|Nonperforming loans to period-end loans                                |  |                             | 0.70   | % |      |   | 0.73   | %
|Nonperforming assets to period-end assets                              |  |                             | 0.60   | % |      |   | 0.55   | %
|Net charge-offs to average loans (annualized)                          |  |                             | 0.24   | % |      |   | 0.34   | %

INTEREST RATE SENSITIVITY

Interest rate risk is the risk to interest income attributed to the repricing characteristics of interest sensitive assets and liabilities. An interest sensitive asset or liability is one that experiences changes in
cashflows as a direct result of changes in market interest rates.

We manage interest rate risk by positioning the balance sheet to maximize net interest
income while maintaining an acceptable level of risk, remaining mindful of the relationship between profitability, liquidity and interest rate risk. The overall interest rate risk position and strategies for the management of interest rate risk are
reviewed by senior management, the Asset/Liability Management Committee and our Board of Directors on an ongoing basis.

We measure interest rate risk
using a variety of methodologies including, but not limited to, dynamic simulation analysis, gap analysis and static balance sheet rate shocks. Dynamic simulation analysis is the primary tool used to measure interest rate risk and allow us to model
the effects of non-parallel movements in multiple yield curves, changes in borrower and depositor behaviors, changes in loan and deposit pricing, and changes in loan and deposit portfolio compositions and growth rates over a 24-month horizon.



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We utilize static balance sheet rate shocks to estimate the potential impact on net interest income of changes in
interest rates under various rate scenarios. This analysis estimates a percentage of change in these metrics from the stable rate base scenario versus alternative scenarios of rising and falling market interest rates by instantaneously shocking a
static balance sheet. The following table summarizes the simulated change over a 12-month horizon as of March 31, 2006 and December 31, 2005:



|                                       |  |                                        |  
|-------------------------------------- |  | -------------------------------------- | -
|Changes inInterest Rates(Basis
Points) |  | Increase(Decrease)in NetInterestIncome |  
|March 31, 2006                         |  |                                        |  
|+200                                   |  | 7.93                                   | %
|+100                                   |  | 4.05                                   | %
|Base                                   |  | 0.00                                   | %
|-100                                   |  | -4.46                                  | %
|-200                                   |  | -11.79                                 | %
|                                       | 
|December 31, 2005                      |  |                                        |  
|+200                                   |  | 6.59                                   | %
|+100                                   |  | 3.45                                   | %
|Base                                   |  | 0.00                                   | %
|-100                                   |  | -3.43                                  | %
|-200                                   |  | -10.68                                 | %

Each rate scenario reflects unique prepayment and repricing assumptions. Because of uncertainties related to
customer behaviors, loan and deposit pricing levels, competitor behaviors, and socio-economic factors that could effect the shape of the yield curves, this analysis is not intended to and does not provide a precise forecast of the affect actual
changes in market rates will have on the Company. The interest rate sensitivity analysis includes assumptions that (i) the composition of our interest sensitive assets and liabilities existing at period-end will remain constant over the
measurement period; and (ii) changes in market rates are parallel and instantaneous across the yield curve regardless of duration or repricing characteristics of specific assets or liabilities. Further, this analysis does not contemplate any
actions that we might undertake in response to changes in market factors. Accordingly, this analysis is not intended to and does not provide a precise forecast of the affect actual changes in market rates will have on the Company.

CAPITAL AND LIQUIDITY

Capital  At March 31,
2006, shareholders equity totaled $340.3 million or 9.08% of total assets, as compared to $334.5 million or 8.97% of total assets at December 31, 2005. Our risk-based capital ratios together with the minimum capital amounts and ratios at
March 31, 2006 were as follows (dollars in thousands):



|                                         |  |        |         |       |                                     |   |        |   |         |  |     |  
|---------------------------------------- |  | ------ | ------- | ----- | ----------------------------------- | - | ------ | - | ------- |  | --- | -
|                                         |  | Actual |         |       | For MinimumCapital AdequacyPurposes |  
|                                         |  | Amount |         | Ratio |                                     |   | Amount |   | Ratio   | 
|Total capital (to risk weighted assets)  |  | $      | 418,420 |       | 12.3                                | % |        | $ | 272,400 |  | 8.0 | %
|Tier 1 capital (to risk weighted assets) |  |        | 341,220 |       | 10.0                                | % |        |   | 136,200 |  | 4.0 | %
|Tier 1 capital (to average assets)       |  |        | 341,220 |       | 9.3                                 | % |        |   | 146,812 |  | 4.0 | %

See Note 10 to our Consolidated Financial Statements for further discussion of
regulatory capital requirements.

Liquidity  The objectives of our liquidity management is to maintain our ability to meet day-to-day
deposit withdrawals and other payment obligations, to raise funds to support asset growth, to maintain reserve



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requirements and otherwise operate on an ongoing basis. We strive to manage a liquidity position sufficient to meet operating requirements while maintaining
an appropriate balance between assets and liabilities to meet the expectations of our shareholders. In recent years, our liquidity needs have primarily been met by growth in core deposits. In addition to core deposits, we have access to funds from
correspondent banks and from the Federal Home Loan Bank, supplemented by amortizing securities and loan portfolios. The Bank also accepts brokered certificates of deposit. For more information regarding liquidity, please refer to our 2005 Annual
Report on Form 10-K.

Sterling Bancshares must provide for its own liquidity and fund its own obligations. The primary source of Sterling Bancshares
revenues is from dividends declared by the Bank. There are statutory and regulatory provisions that could limit the ability of the Bank to pay dividends to Sterling Bancshares. Under these provisions, there was an aggregate of approximately $140
million available for payment of dividends at March 31, 2006, by the Bank. At March 31, 2006, the aggregate amount of dividends, which legally could be paid without prior approval of various regulatory agencies, totaled $72 million. It is
not anticipated that such restrictions will have an impact on the ability of Sterling Bancshares to meet its ongoing cash obligations. As of March 31, 2006, we did not have any material commitments for capital expenditures.

On May 8, 2006, Sterling Bancshares prepaid all of its $29.6 million 9.20% Junior Subordinated Deferrable Interest Debentures. See Item 5 below. The payment of these
Debentures was funded by a dividend from the Bank.

On April 25, 2005, the Companys Board of Directors authorized the repurchase of up to
2,500,000 shares of common stock, not to exceed 500,000 shares in any calendar year. The Company may repurchase shares of its common stock from time to time in the open market or through privately negotiated transactions. The table below lists the
Companys purchases of its equity securities registered pursuant to Section 12 of the Exchange Act during the quarter ended March 31 2006:



|                                    |  |                                |  |                                     |       |                                                                    |         |                                                |          
|----------------------------------- |  | ------------------------------ |  | ----------------------------------- | ----- | ------------------------------------------------------------------ | ------- | ---------------------------------------------- | ---------
|Period                              |  | Total Numberof SharesPurchased |  | Weighted AveragePrice Paid perShare |       | Total Number of SharesPurchased as Part of PubliclyAnnounced Plans |         | Shares That May Yet BePurchased Under thePlans
|January 1, 2006 to January 31, 2006 |  | 125,000                        |  | $                                   | 15.93 |                                                                    | 250,000 |                                                | 2,250,000

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There have been no material changes
in market risk we face since December 31, 2005. For information regarding the market risk of our financial instruments, see Managements Discussion and Analysis of Financial Condition and Results of Operations  Interest Rate
Sensitivity. Our principal market risk exposure is to interest rates.

ITEM 4.    CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures 
As of the end of the period covered by this report, an evaluation was made by the Companys management, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Companys disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and
procedures were effective as of the end of the period.

There were no changes in the Companys internal control over financial reporting (as defined
in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



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##### Table of Contents

PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS.

Not applicable.

ITEM 1A.    RISK FACTORS

Information regarding risk factors appears in Managements Discussion
and Analysis of Financial Condition and Results of Operations  Forward-Looking Statements, in Part I  Item 2 of this Form 10-Q and in Part I- Item 1A of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2005. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

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

Not applicable.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

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

Not applicable.

ITEM 5.    OTHER INFORMATION.

On May 8, 2006, Sterling Bancshares Capital Trust III (the
Trust), a subsidiary of the Company, redeemed all 1.2 million of its 9.20% Cumulative Trust Preferred Securities (Nasdaq: SBIBO) and all 35,567 of its 9.20% Common Securities at a redemption price equal to the $25.00 liquidation amount
of each security, plus all accrued and unpaid distributions per security to the Redemption Date.

The Trust is taking such action in connection with the
concurrent prepayment by the Company of all of its $29.6 million 9.20% Junior Subordinated Deferrable Interest Debentures (the Debentures) due March 21, 2031 which were held exclusively by the Trust. The Debentures were prepaid on the
Redemption Date at a prepayment price equal to the principal outstanding amount of the Debentures plus accrued and unpaid interest to the Redemption Date.

ITEM 6.    EXHIBITS.



|       |  |   |  |                                                                                                                                                                    
|------ |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|11     |  |  |  | Statement Regarding Computation of Earnings Per Share (included as Note (7) to Consolidated Financial Statements on page 14 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 |  |  |  | Section 1350 Certification of the Chief Executive Officer.                                                                                                         
|       |  |  
|**32.2 |  |  |  | Section 1350 Certification of the Chief Financial Officer.                                                                                                         

---

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

|** | As furnished herewith.
|-- | ----------------------



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##### 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: May 8, 2006 |  |  |  | By:                       |  | /S/    J. DOWNEY
BRIDGWATER
|                  |  |  |  |                           |  |                             |  | J. Downey Bridgwater President
and Chief Executive Officer (Principal executive
officer)                             
|                  |  |  | 
|Date: May 8, 2006 |  |  |  | By:                       |  | /S/    STEPHEN C.
RAFFAELE 
|                  |  |  |  |                           |  |                             |  | Stephen C. Raffaele Executive Vice
President and Chief Financial Officer (Principal
financial and accounting officer)



33



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##### Table of Contents

EXHIBIT INDEX



|        |  |   |  |                                                                                                                                                                    
|------- |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |   |  | Description                                                                                                                                                        
|        |  |  
|11      |  |  |  | Statement Regarding Computation of Earnings Per Share (included as Note (6) to Consolidated Financial Statements on page 12 of this Quarterly Report on Form 10-Q).
|        |  |  
|*31.1   |  |  |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of J. Downey Bridgwater, President and Chief Executive Officer.                            
|        |  |  
|*31.2   |  |  |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Stephen C. Raffaele, Executive Vice President and Chief Financial Officer.              
|        |  |  
|**32.1  |  |  |  | Section 1350 Certification of the Chief Executive Officer.                                                                                                         
|        |  |  
|**32.2  |  |  |  | Section 1350 Certification of the Chief Financial Officer.                                                                                                         

---

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

|** | As furnished herewith.
|-- | ----------------------



34