<PAGE>

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

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

                            ------------------------

                                   FORM 10-K/A
                                 AMENDMENT NO. 1

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE
    ACT OF 1934
                    FOR FISCAL YEAR ENDED DECEMBER 31, 2002
                                       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                              (I.R.S. employer
 incorporation or organization)                           identification number)

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

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 466-8300

                            ------------------------

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                          Common Stock, $1.00 par value
                                (Title of Class)

         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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (17 CFR 229.405) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]

         Indicate by check mark whether the registrant is an accelerated filer
(as defined by Rule 12b-2 of the Act). Yes [X] No [ ]

         The aggregate market value of the registrant's Common Stock held by
non-affiliates as of June 28, 2002, the last business day of the most recently
completed second fiscal quarter, was $587,252,851 based on the closing sales
price of $14.77 on such date. For purposes of this calculation, affiliates are
defined as all directors and executive officers.

        As of February 28, 2003, registrant had outstanding 43,990,054 shares of
Common Stock, $1.00 par value.

         DOCUMENTS INCORPORATED BY REFERENCE: Portions of Sterling Bancshares,
Inc.'s definitive proxy statement relating to the registrant's 2003 Annual
Meeting of Shareholders, which proxy statement will be filed under the
Securities Exchange Act of 1934 within 120 days of the end of the registrant's
fiscal year ended December 31, 2002, are incorporated by reference into Part III
of this Form 10-K.

<PAGE>

                                EXPLANATORY NOTE

         The purpose of this Amendment No. 1 to the Annual Report on Form 10-K
of Sterling Bancshares, Inc. (the "Company") for the year ended December 31,
2002 (the "Original Form 10-K") is to restate the Company's accompanying
consolidated financial statements for the fiscal year ended December 31, 2002
and to revise related disclosures in the Original Form 10-K. This restatement is
described in detail in Note Z to the consolidated financial statements. On
October 21, 2003, in connection with the Company's earnings release for the
quarter ending September 30, 2003, we issued a press release that described our
intention to restate these financial statements. The Company filed the press
release as an exhibit to our Current Report on Form 8-K filed October 21, 2003.

         Subsequent to the issuance of our consolidated financial statements as
of December 31, 2002 and the filing of the Original Form 10-K, we determined
that the pending sales of our banking offices in Eagle Pass, Carrizo Springs,
Crystal City and Pearsall and the financial results and condition pertaining to
these offices should not have been separately reported as discontinued
operations. The Company initially determined that the sales of the banking
offices met the requirements of SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", for presentation as discontinued operations.
However, after further consideration, we have determined that the proposed sales
of the banking offices in Eagle Pass, Carrizo Springs, Crystal City and Pearsall
do not meet such requirements. Net income, basic and diluted earnings per share
and shareholders' equity were not affected by such presentation. As a result, we
have determined it necessary to amend the Original Form 10-K so that the
financial results and condition pertaining to these four (4) South Texas banking
offices are not separately reported as discontinued operations.

         This Amendment No. 1 amends and restates in its entirety Part II, Items
6, 7, 8 and 9a (previously Item 14), and Part IV, Item 15 of the Original Form
10-K. This Amendment No. 1 continues to reflect circumstances as of the date of
the filing of the Original Form 10-K and does not reflect events occurring after
the filing of the Original Form 10-K, or modify or update those disclosures in
any way, except as required to reflect the effects of the restatement as
described in Note Z to the consolidated accompanying financial statements.


                                        1

<PAGE>
PART II

ITEM 6 -- SELECTED FINANCIAL DATA

Subsequent to the issuance of our consolidated financial statements as of
December 31, 2002 and the filing of our Annual Report on Form 10-K for the year
ended December 31, 2002, we restated our consolidated financial statements for
the year ended December 31, 2002 so that the pending sales of our banking
offices in Eagle Pass, Carrizo Springs, Crystal City and Pearsall and the
financial results and condition pertaining to these four (4) banking offices
would not be separately reported as discontinued operations. See Note Z to our
consolidated financial statements for more information and a presentation of the
impact of the restatement on our previously filed consolidated financial
statements.

The following table sets forth summary historical data for the Company for the
periods indicated. During the periods indicated, the Company completed seven
acquisitions of bank holding companies and/or banks in merger transactions that
were accounted for using either the purchase method of accounting or the
"pooling of interests" method of accounting. With respect to the four mergers
completed during the reported periods which were accounted for using the
"pooling of interests" method, all financial data relating to such entities
prior to the respective mergers have been restated to include the merged
entities' balance sheet data and historical results of operations. In addition,
data has been restated to reflect the effect of stock splits where applicable.

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31,
                                                           ------------------------------------------------------------------
                                                              2002          2001          2000          1999          1998
                                                           ----------    ----------    ----------    ----------    ----------
                                                                        (In thousands, except for per share amounts)
<S>                                                        <C>           <C>           <C>           <C>           <C>
SUMMARY OF INCOME:
Interest income                                            $  178,858    $  172,599    $  166,523    $  129,291    $  115,586
Interest expense                                               31,763        50,052        62,824        37,470        34,600
                                                           ----------    ----------    ----------    ----------    ----------
Net interest income                                           147,095       122,547       103,699        91,821        80,986
Provision for credit losses                                    14,018        11,684         9,668         9,236         6,275
Noninterest income                                             96,624        66,625        41,642        30,632        23,014
Noninterest expense                                           175,072       130,677        95,492        81,778        69,699
                                                           ----------    ----------    ----------    ----------    ----------
Income before income taxes                                     54,629        46,811        40,181        31,439        28,026
Provision for income taxes                                     18,078        16,410        12,641         9,803         9,116
                                                           ----------    ----------    ----------    ----------    ----------
Net income                                                 $   36,551    $   30,401    $   27,540    $   21,636    $   18,910
                                                           ==========    ==========    ==========    ==========    ==========

COMMON SHARE DATA:
Basic earnings per share                                   $     0.83    $     0.72    $     0.66    $     0.52    $     0.47
Diluted earnings per share                                 $     0.82    $     0.71    $     0.65    $     0.51    $     0.46
Cash dividends declared                                    $    0.160    $    0.147    $    0.133    $    0.120    $    0.107
Book value per share at period-end                         $     5.65    $     4.96    $     3.98    $     3.40    $     2.98
Tangible book value per share at period-end                $     4.26    $     3.70    $     3.84    $     3.25    $     2.83
Weighted average common shares                                 43,872        42,180        41,596        41,422        39,830
Weighted average common and common equivalent shares           44,756        43,044        42,212        42,218        41,276

BALANCE SHEET DATA (at period-end):
Total assets                                               $3,582,745    $2,778,090    $2,077,214    $2,060,112    $1,591,284
Loans, net of unearned discount                             2,644,862     1,928,293     1,484,990     1,261,273     1,079,657
Allowance for credit losses                                    27,621        22,927        16,862        13,998        11,352
Total securities                                              313,054       329,416       295,392       528,743       263,682
Deposits                                                    2,673,072     2,268,980     1,718,822     1,508,789     1,410,076
Other borrowed funds                                          509,590       180,298       140,364       362,332        15,333
Notes payable                                                  21,430        20,879         1,600             -         2,069
Company-obligated mandatorily redeemable trust preferred
  securities of subsidiary trust                               80,000        57,500        28,750        28,750        28,750
Shareholders' equity                                          249,327       217,369       166,825       141,070       122,040

SELECTED PERFORMANCE RATIOS:
Return on average assets                                         1.21%         1.24%         1.32%         1.26%         1.25%
Return on average shareholders' equity                          15.44%        16.58%        17.82%        16.37%        17.02%
Dividend payout ratio                                           19.24%        19.45%        19.04%        20.85%        21.71%
Net interest margin (tax equivalent)                             5.61%         5.76%         5.61%         6.05%         6.02%

ASSET QUALITY RATIOS:
Period-end nonperforming loans to total loans                    0.74%         0.74%         0.65%         0.48%         0.51%
Period-end nonperforming assets to total assets                  0.64%         0.58%         0.55%         0.37%         0.49%
Period-end allowance for credit losses to nonperforming
  loans                                                        140.54%       161.51%       175.74%       229.89%       207.53%
Period-end allowance for credit losses to total loans            1.04%         1.19%         1.14%         1.11%         1.05%
Net charge-offs to average loans                                 0.45%         0.49%         0.51%         0.59%         0.38%

LIQUIDITY AND CAPITAL RATIOS:
Average loans to average deposits                               92.74%        84.28%        83.34%        77.70%        74.37%
Period-end shareholders' equity to total assets                  6.96%         7.82%         8.03%         6.85%         7.67%
Average shareholders' equity to average assets                   7.83%         7.50%         7.41%         7.70%         7.36%
Period-end Tier 1 capital to risk weighted assets                8.41%         9.64%        10.51%        10.82%        11.56%
Period-end total capital to risk weighted assets                 9.29%        10.66%        11.26%        11.74%        12.45%
Period-end Tier 1 leverage ratio (Tier 1 capital to
  total average assets)                                          7.81%         8.40%         9.10%         8.21%         9.39%
</TABLE>

                                        2

<PAGE>

ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the Company analyzes the major elements of the Company's
consolidated balance sheets and statements of income. The following
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" reflects certain restatements to the Company's previously reported
consolidated financial statements for the year ended December 31, 2002. (See
"Restatement of Financial Statements" below). This section should be read in
conjunction with the Company's consolidated financial statements and
accompanying notes and other detailed information incorporated by reference.

During the periods indicated, the Company completed seven acquisitions of bank
holding companies and/or banks in merger transactions that were accounted for
using either the purchase method of accounting or the "pooling of interests"
method of accounting. With respect to the four mergers completed during the
reported periods which were accounted for using the "pooling of interests"
method, all financial data relating to such entities to the respective mergers
have been restated to include the merged entities' balance sheet data and
historical results of operations.

Certain statements under this caption constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which involve
risks and uncertainties. Our actual results may differ significantly from the
results discussed in such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those factors discussed in
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Risk Factors and Cautionary Statement for Purposes of the
Provisions of the 'Safe Harbor' Provisions of the Private Securities Litigation
Reform Act of 1995" below.

RESTATEMENT OF FINANCIAL STATEMENTS

The accompanying consolidated financial statements for the year ended December
31, 2002 have been restated so that the pending sales of our banking offices in
Eagle Pass, Carrizo Springs, Crystal City and Pearsall and the financial results
and condition pertaining to these four (4) South Texas banking offices are not
separately reported as discontinued operations. The Company had previously
reported the pending sales of these four (4) banking offices and their related
financial results and condition as discontinued operations. The restatement no
longer separately reports the four (4) banking offices and their respective
financial results and condition as discontinued operations and reflects all
required adjustments. Net income, basic and diluted earnings per share and
shareholders' equity for the previously reported period were not affected by the
restatement. This restatement is described in detail in Note Z to the
consolidated financial statements.

CRITICAL ACCOUNTING ESTIMATES

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

Allowance for credit losses - The allowance for credit losses is a valuation
allowance for probable losses incurred on loans. Loans are charged to the
allowance when the loss actually occurs or when a determination is made that a
probable loss has occurred. Recoveries are credited to the allowance at the time
of recovery. Throughout the year, management estimates the probable level of
losses to determine whether the allowance for credit losses is adequate to
absorb losses in the existing portfolio. Based on these estimates, an amount is
charged to the provision for credit losses and credited to the allowance for
credit losses in order to adjust the allowance to a level determined to be
adequate to absorb losses. Management's judgment as to the level of probable
losses on existing loans involves the consideration of current economic
conditions and their estimated effects on specific borrowers; an evaluation of
the existing relationships among loans, potential credit losses and the present
level of the allowance; results of examinations of the loan portfolio by
regulatory agencies; and management's internal review of the loan portfolio. In
determining the collectibility of certain loans, management also considers the
fair value of any underlying collateral. The amount ultimately realized may
differ from the carrying value of these assets because of economic, operating or
other conditions beyond the Company's control. Please refer to the subsequent
discussion of "Allowance for Credit Losses" below as well

                                        3

<PAGE>

as Note A to the consolidated financial statements in this annual report for
additional insight into management's approach and methodology in estimating the
allowance for credit losses.

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

NON-GAAP PRESENTATIONS

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

RESULTS OF OPERATIONS

PERFORMANCE SUMMARY

Net income for 2002 was $36.6 million compared with $30.4 million in 2001, an
increase of 20.2%. Diluted earnings per share were $.82 in 2002 and $.71 in
2001, an increase of 15.5%. Included in net income is the after-tax merger
related charges of $631,000 in 2002 and $2.1 million in 2001. In addition to the
merger costs, the Company incurred noncash expenses of $1.4 million in 2002 in
relation to the prepayment of its 9.28% Trust Preferred Securities. Please refer
to "Company-Obligated Mandatorily Redeemable Trust Preferred Securities" below.
Net income for 2001 was $30.4 million or $.71 per diluted share. After-tax
acquisition charges of $2.1 million, are included in net income. All per share
amounts have been restated to reflect the stock splits effected as stock
dividends through September 18, 2001.

Two industry measures of the performance by a banking institution are its return
on average assets and return on average equity. Return on average assets ("ROA")
measures net earnings in relation to average total assets and indicates a
company's ability to employ its resources profitably. During 2002, the Company's
ROA was 1.21%, as compared to 1.24% and 1.32% for 2001 and 2000, respectively.
During 2002, the Company's return on equity was 15.44% compared to 16.58% and
17.82% for 2001 and 2000, respectively.

NET INTEREST INCOME AND NET INTEREST MARGIN

Net interest income represents the amount by which interest income on interest
earning assets, including securities and loans, exceeds interest paid on
interest bearing liabilities, including deposits and other borrowed funds. Net
interest income is the principal source of the Company's earnings. Interest rate
fluctuations, as well as changes in the amount and type of earning assets and
liabilities, combine to affect net interest income.

Net interest income for 2002 was $147.1 million, up $24.5 million or 20.0% from
$122.5 million for 2001. The growth in net interest income is primarily
attributable to decreasing interest rates in 2001 and the 29.8% increase in
average loans. The loan growth related to the acquisitions of ENB Bankshares,
CaminoReal Bancshares and Community Bancshares was 5.1%. Since the Lone Star
Bancorporation acquisition was accounted for using the "pooling of interests"
accounting method, the financial data was restated to include Lone Star
Bancorporation's balance sheet data and historical results of operations, and
there is no loan growth separately attributable to the acquisition of Lone Star
Bancorporation. The Federal Reserve Bank decreased the discount rate in the
aggregate by 475 basis points in 2001 and 50 basis points in November of 2002.
Consequently, the Bank's yields decreased in 2001 and 2002 as a result of the
Bank lowering its prime rate in relation to the Federal Reserve decreases. While
average earning assets increased 22.9%, the yield decreased 126 basis points
from 8.01% in 2001 to 6.75% in 2002. As of December 31, 2002, average interest
bearing liabilities were $1.8 billion, an increase of $321.4 million or 21.2%
from December 31, 2001. Average interest bearing deposits increased 14.6%. The
increase in average interest bearing deposits related to the acquisitions of ENB
Bankshares, CaminoReal Bancshares and Community Bancshares was 7.8%. The cost of
interest bearing liabilities decreased 158 basis points from 3.31% in 2001 to
1.73% in 2002. The Company's 5.55% net interest margin for 2003 decreased from
the 5.69% net interest margin recorded in 2002. The Company's 5.61% tax
equivalent net interest margin for 2002 decreased from the 5.76% recorded in
2001.

                                        4
<PAGE>

Net interest income for 2001 was $122.5 million, up $18.8 million or 18.2% from
$103.7 million for 2000. The growth in net interest income is primarily
attributable to the 27.2% increase in average loans. Average earning assets
increased 15.0% from 2000 to 2001. During the latter part of 2000, the Bank
deleveraged its balance sheet resulting in a decrease in average securities of
30.2% from 2000 to 2001. The yield on interest earning assets decreased 88 basis
points from 8.89% in 2000 to 8.01% in 2001. Additionally during 2000, the Board
of Governors of the Federal Reserve System ("Federal Reserve") increased the
discount rate a total of 100 basis points whereas in 2001, the Federal Reserve
decreased the discount rate 11 times for a total of 475 basis points. The cost
of interest bearing liabilities decreased 133 basis points from 4.64% in 2000 to
3.31% in 2001. This decrease in rates was due to a combination of the Federal
Reserve rate decreases as well as the deleveraging of the balance sheet. The
Company's 5.69% net interest margin for 2002 increased from the 5.53% net
interest margin recorded in 2001. For 2001, the tax equivalent net interest
margin increased 15 basis points to 5.76% from 5.61% for 2000.

To provide a more in-depth analysis of net interest income, the following
average balance sheets and net interest income analysis detail the contribution
of interest earning assets to overall net interest income and the impact of the
cost of funds:

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                          --------------------------------------------------------------------
                                                          2002                              2001
                                          ----------------------------------   -------------------------------
                                            AVERAGE                  AVERAGE    AVERAGE                AVERAGE
                                            BALANCE       INTEREST    YIELD     BALANCE     INTEREST    YIELD
                                          -----------   -----------  -------   ----------   ---------  -------
                                                                     (In thousands)
<S>                                       <C>           <C>          <C>       <C>          <C>        <C>
INTEREST EARNING ASSETS:
Deposits in financial institutions        $     1,960   $       106    5.41%   $    1,235   $      79    6.40%
Federal funds sold and securities
  purchased under agreements to resell         25,326           463    1.83%       74,229       3,578    4.82%
Trading assets                                114,752         4,540    3.96%       49,352       2,787    5.65%
Securities (taxable)                          242,004        13,957    5.77%      265,064      16,667    6.29%
Securities (non-taxable)                       66,509         2,890    4.35%       70,814       3,304    4.67%
Loans held for sale (taxable) (1)             407,055        27,660    6.80%      179,627      13,459    7.49%
Loans held for investment (taxable) (1)     1,785,490       128,935    7.22%    1,510,000     132,440    8.77%
Loans held for investment (non-taxable)         5,330           307    5.76%        4,240         285    6.72%
                                          -----------   -----------    ----    ----------   ---------    ----
  Total interest earning assets             2,648,426       178,858    6.75%    2,154,561     172,599    8.01%

NONINTEREST EARNING ASSETS:
Cash and due from banks                        97,404                              88,773
Premises and equipment, net                    55,638                              53,525
Other assets                                  245,885                             169,205
Allowance for credit losses                   (25,192)                            (20,296)
                                          -----------                          ----------
  Total noninterest earning assets            373,735                             291,207
                                          -----------                          ----------
  Total assets                            $ 3,022,161                          $2,445,768
                                          ===========                          ==========

INTEREST BEARING LIABILITIES:
Demand and savings deposits               $   887,544   $     8,541    0.96%   $  784,054   $  16,915    2.16%
Certificates and other time deposits          638,048        17,479    2.74%      547,600      26,141    4.77%
Other borrowed funds                          284,965         4,946    1.74%      175,106       6,861    3.92%
Notes payable                                  20,985           797    3.80%        3,369         135    4.01%
                                          -----------   -----------    ----    ----------   ---------    ----
  Total interest bearing liabilities        1,831,542        31,763    1.73%    1,510,129      50,052    3.31%

NONINTEREST BEARING LIABILITIES:
Demand deposits                               844,401                             678,134
Other liabilities                              39,929                              21,330
                                          -----------                          ----------
  Total noninterest bearing liabilities       884,330                             699,464

Trust preferred securities                     69,620                              52,853
Shareholders' equity                          236,669                             183,322
                                          -----------                          ----------
  Total liabilities and shareholders'
    equity                                $ 3,022,161                          $2,445,768
                                          ===========                          ==========

Net interest income and margin (2)                      $   147,095    5.55%                $ 122,547    5.69%
                                                        ===========    ====                 =========    ====

Net interest income and margin
 (tax-equivalent basis) (3)                             $   148,677    5.61%                $ 124,190    5.76%
                                                        ===========    ====                 =========    ====
<CAPTION>
                                                YEAR ENDED DECEMBER 31,
                                          ----------------------------------
                                                          2000
                                          ----------------------------------
                                            AVERAGE                   AVERAGE
                                            BALANCE       INTEREST     YIELD
                                          -----------     ---------   -------
                                                      (In thousands)
<S>                                       <C>             <C>         <C>
INTEREST EARNING ASSETS:
Deposits in financial institutions        $     1,225     $      74    6.04%
Federal funds sold and securities
  purchased under agreements to resell         60,401         4,471    7.40%
Trading assets                                      -             -       -
Securities (taxable)                          400,815        27,214    6.79%
Securities (non-taxable)                       80,282         3,503    4.36%
Loans held for sale (taxable) (1)              84,736         7,301    8.62%
Loans held for investment (taxable) (1)     1,245,621       123,902    9.95%
Loans held for investment (non-taxable)           925            58    6.27%
                                          -----------     ---------    ----
  Total interest earning assets             1,874,005       166,523    8.89%

NONINTEREST EARNING ASSETS:
Cash and due from banks                        68,710
Premises and equipment, net                    45,892
Other assets                                  114,381
Allowance for credit losses                   (15,454)
                                          -----------
  Total noninterest earning assets            213,529
                                          -----------
  Total assets                            $ 2,087,534
                                          ===========

INTEREST BEARING LIABILITIES:
Demand and savings deposits               $   621,038     $  19,879    3.20%
Certificates and other time deposits          440,062        24,256    5.51%
Other borrowed funds                          293,556        18,653    6.35%
Notes payable                                     416            36    8.65%
                                          -----------     ---------    ----
  Total interest bearing liabilities        1,355,072        62,824    4.64%

NONINTEREST BEARING LIABILITIES:
Demand deposits                               536,351
Other liabilities                              12,772
                                          -----------
  Total noninterest bearing liabilities       549,123

Trust preferred securities                     28,750
Shareholders' equity                          154,589
                                          -----------
  Total liabilities and shareholders'
    equity                                $ 2,087,534
                                          ===========

Net interest income and margin (2)                        $ 103,699    5.53%
                                                          =========    ====

Net interest income and margin
 (tax-equivalent basis) (3)                               $ 105,133    5.61%
                                                          =========    ====
</TABLE>

-----------------------
(1) Loan origination fees are considered adjustments to interest income. These
    fees aggregated $5,144,000, $2,776,000 and $2,232,000 for the years ended
    December 31, 2002, 2001 and 2000, respectively. Related loan origination
    costs are not separately allocated to loans, but are charged to non-interest
    expense. For the purpose of calculating loan yields, average loan balances
    include nonaccrual loans with no related interest income.

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

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


                                        5

<PAGE>

The following rate/volume analysis shows the portions of the net change in
interest income due to changes in volume or rate. The changes in interest income
due to both rate and volume in the analysis have been allocated to the volume or
rate change in proportion to the absolute amounts of the change in each (in
thousands):

<TABLE>
<CAPTION>
                                                          2002 VS. 2001                            2001 VS. 2000
                                                       INCREASE (DECREASE)                      INCREASE (DECREASE)
                                                        DUE TO CHANGES IN:                      DUE TO CHANGES IN:
                                               -----------------------------------    ------------------------------------
                                                 VOLUME       RATE         TOTAL        VOLUME       RATE         TOTAL
                                               ---------   ----------    ---------    ----------  ----------    ----------
<S>                                            <C>         <C>           <C>          <C>         <C>           <C>
INTEREST EARNING ASSETS:
Deposits in financial institutions             $      39   $      (12)   $      27    $        1  $        4    $        5
Federal funds sold and securities purchased
  under agreements to resell                        (894)      (2,221)      (3,115)          667      (1,560)         (893)
Trading assets                                     2,587         (834)       1,753         2,787           -         2,787
Securities (taxable)                              (1,330)      (1,380)      (2,710)       (8,536)     (2,011)      (10,547)
Securities (non-taxable)                            (187)        (227)        (414)         (442)        243          (199)
Loans held for sale (taxable)                     15,454       (1,253)      14,201         7,110        (952)        6,158
Loans held for investment (taxable)               19,894      (23,399)      (3,505)       23,188     (14,650)        8,538
Loans held for investment (non-taxable)               63          (41)          22           223           4           227
                                               ---------   ----------    ---------    ----------  ----------    ----------
Total interest income                             35,626      (29,367)       6,259        24,998     (18,922)        6,076
                                               ---------   ----------    ---------    ----------  ----------    ----------

INTEREST BEARING LIABILITIES:
Demand and savings deposits                          996       (9,370)      (8,374)        3,517      (6,481)       (2,964)
Certificates and other time deposits               2,478      (11,140)      (8,662)        5,134      (3,249)        1,885
Other borrowed funds                               1,907       (3,822)      (1,915)       (4,641)     (7,151)      (11,792)
Notes payable                                        669           (7)         662           118         (19)           99
                                               ---------   ----------    ---------    ----------  ----------    ----------
Total interest expense                             6,050      (24,339)     (18,289)        4,128     (16,900)      (12,772)
                                               ---------   ----------    ---------    ----------  ----------    ----------

Net interest income                            $  29,576   $   (5,028)   $  24,548    $   20,870  $   (2,022)   $   18,848
                                               =========   ==========    =========    ==========  ==========    ==========
</TABLE>

NONINTEREST INCOME

The Company's noninterest income consists primarily of customer service fees,
gains arising from the sale of mortgage loans and origination fees relating to
mortgage loans. Noninterest income for 2002 totaled $96.6 million, an increase
of $30.0 million or 45.0% over the $66.6 million in 2001. Noninterest income for
2001 totaled $66.6 million, an increase of $25.0 million or 60.0% over the $41.6
million in 2000. The following table shows the breakout of noninterest income
between commercial banking and mortgage banking for 2002, 2001 and 2000 (in
thousands):

<TABLE>
<CAPTION>
                                                   2002                             2001
                                        -----------------------------   -------------------------------
                                        COMMERCIAL  MORTGAGE            COMMERCIAL  MORTGAGE
                                         BANKING    BANKING   COMBINED    BANKING   BANKING    COMBINED
                                         -------    -------   --------    -------   -------    --------
<S>                                     <C>         <C>       <C>       <C>         <C>        <C>
Customer service fees                    $16,893    $     -   $16,893    $14,834    $     -    $14,834
Gains on sale of mortgage loans                -     32,385    32,385          -     24,206     24,206
Origination fees                               -     23,641    23,641          -     10,392     10,392
Servicing fees                                 -      3,207     3,207          -      1,051      1,051
Bank-owned life insurance income           2,084          -     2,084      2,049          -      2,049
Debit card fees                            1,327          -     1,327        877          -        877
Gain on the sale of trading
  assets                                   1,018          -     1,018        298          -        298
Gain on the sale of
  credit card loan portfolio                   -          -         -          -          -          -
Gain on the sale of land                       -          -         -          -          -          -
Other                                      8,289      7,780    16,069      6,592      6,326     12,918
                                         -------    -------   -------    -------    -------    -------
                                         $29,611    $67,013   $96,624    $24,650    $41,975    $66,625
                                         =======    =======   =======    =======    =======    =======

<CAPTION>
                                                     2000
                                        -------------------------------
                                        COMMERCIAL  MORTGAGE
                                         BANKING    BANKING    COMBINED
                                        --------    -------    --------
<S>                                     <C>         <C>        <C>
Customer service fees                   $ 10,832    $     -    $10,832
Gains on sale of mortgage loans                -     11,959     11,959
Origination fees                               -      5,892      5,892
Servicing fees                                 -        426        426
Bank-owned life insurance income           1,888          -      1,888
Debit card fees                              223          -        223
Gain on the sale of trading
  assets                                       -          -          -
Gain on the sale of
  credit card loan portfolio                 237          -        237
Gain on the sale of land                     244          -        244
Other                                      6,422      3,519      9,941
                                        --------    -------    -------
                                        $ 19,846    $21,796    $41,642
                                        ========    =======    =======
</TABLE>

COMMERCIAL BANKING SEGMENT. For 2002, noninterest income was $29.6 million, as
compared to $24.7 million for 2001, an increase of $5.0 million or 20.1%. During
2002, customer service fees increased $2.1 million or

                                        6

<PAGE>

13.9%, as a result of the acquisitions of Eagle National, Community and
CaminoReal and the growth in deposit transaction accounts. The increase of
$720,000 from the gain on trading assets is due to the trading department being
established in the second quarter of 2001. Increased debit card usage caused the
debit card fees to increase $450,000. In 2002, the Bank began selling the
guaranteed portion of SBA loans resulting in a premium of $312,000 being
recognized in 2002. Also in 2002, the Bank began selling fixed and variable
annuity products and recorded income totaling $300,000 in 2002. Additionally,
the Company sold the charter for Community Bank in June 2002 for $150,000.
During 2001, customer service fees increased $4.0 million or 36.9%, primarily as
a result of an overall increase in average demand and savings accounts of 26.2%
from volume growth in deposit accounts and the acquisition of CaminoReal Bank.
Also during the latter half of 2000, the Bank introduced its debit card. Fees
related to the debit cards totaled $877,000 in 2001 as compared to $223,000 in
2000. In December 2000, the Bank sold land for a gain of $244,000. Finally,
during the first quarter of 2000, the Bank sold its credit card portfolio to a
correspondent bank for a net gain of $237,000.

MORTGAGE BANKING SEGMENT. For 2002, noninterest income from the mortgage banking
segment increased $25.0 million or 59.6% from $42.0 million for 2001 to $67.0
million in 2002. Income from the mortgage banking segment primarily consists of
origination fees and gains on the sale of mortgage loans. The average length of
time a mortgage loan is held in the portfolio of SCMC is approximately thirty
days. During 2002, SCMC had $4.5 billion in loan fundings as compared to $2.6
billion in 2001. The increase in noninterest income and noninterest expense is
mainly due to the favorable interest rate environment which led to increased
loan refinancing and new loan activity and the opening of thirty-six new retail
locations in 2002. For 2001, noninterest income from the mortgage banking
segment increased $20.2 million or 92.6% from $21.8 million for 2000 to $42.0 in
2001. During 2001, SCMC had $2.6 billion in loan fundings as compared to $1.4
billion in 2000. The increase in noninterest income and noninterest expense is
primarily due to the favorable interest rate environment which led to increased
loan refinancing and new loan activity. In addition, new retail locations were
opened in 2001.

NONINTEREST EXPENSE

Noninterest expense for 2002 totaled $175.1 million, an increase of $44.4
million or 34.0% over the $130.7 million in 2001. Noninterest expense increased
$35.2 million or 36.8% from $95.5 million in 2000 to $130.7 million in 2001.

The following table shows the breakout of noninterest expense between commercial
banking and mortgage banking for 2002, 2001 and 2000 (in thousands):

<TABLE>
<CAPTION>
                                                    2002                            2001
                                      ------------------------------   -------------------------------
                                      COMMERCIAL  MORTGAGE            COMMERCIAL  MORTGAGE
                                        BANKING   BANKING   COMBINED   BANKING    BANKING     COMBINED
                                      ----------  --------  --------  ----------  --------   ---------
<S>                                   <C>         <C>       <C>       <C>        <C>         <C>
Salaries and employee benefits        $   63,430  $ 26,814  $ 90,244   $ 55,115  $  13,916   $  69,031
Occupancy expenses                        15,181     8,663    23,844     13,964      4,320      18,284
Mortgage servicing rights
  amortization and impairment                  -    13,150    13,150          -      1,154       1,154
Technology                                 5,046       676     5,722      5,053        288       5,341
Professional fees                          4,205       536     4,741      2,966        237       3,203
Postage and delivery charges               2,289     1,119     3,408      2,049        528       2,577
Supplies                                   1,401     1,388     2,789      1,512        514       2,026
Net losses and carrying costs of
  real estate acquired by foreclosure        481         -       481        176          -         176
FDIC assessment                              390         -       390        470          -         470
Minority interest expense                  5,916       842     6,758      4,716      2,273       6,989
Conversion costs related to                  822         -       822      3,181          -       3,181
  acquisitions
Other                                     16,945     5,778    22,723     14,873      3,372      18,245
                                      ----------  --------  --------   --------  ---------   ---------
                                      $  116,106  $ 58,966  $175,072   $104,075  $  26,602   $ 130,677
                                      ==========  ========  ========   ========  =========   =========

<CAPTION>
                                                     2000
                                       ----------------------------
                                      COMMERCIAL  MORTGAGE
                                       BANKING    BANKING   COMBINED
                                      ----------  --------  --------
<S>                                   <C>        <C>       <C>
Salaries and employee benefits         $44,660   $  8,803  $ 53,463
Occupancy expenses                      10,229      3,533    13,762
Mortgage servicing rights
  amortization and impairment                -        252       252
Technology                               3,851        122     3,973
Professional fees                        2,117        246     2,363
Postage and delivery charges             1,476        325     1,801
Supplies                                 1,391        428     1,819
Net losses and carrying costs of
  real estate acquired by foreclosure      284          -       284
FDIC assessment                            316          -       316
Minority interest expense                2,668        752     3,420
Conversion costs related to
  acquisitions                               -          -         -
Other                                   11,791      2,248    14,039
                                       -------   --------  --------
                                       $78,783   $ 16,709  $ 95,492
                                       =======   ========  ========
</TABLE>

COMMERCIAL BANKING SEGMENT. For 2002, noninterest expenses related to commercial
banking were $116.1 million, as compared to $104.1 million for 2001, an increase
of $12.0 million or 11.6%. Salaries and employee benefits in the commercial
banking segment for 2002 totaled $63.4 million, an increase of $8.3 million or
15.1% over $55.1 million for 2001. Increased salaries and employee benefits
expenses related to the acquisitions of Eagle National, Community and CaminoReal
offices since acquisition were $2.3 million. Also salaries increased due to the
new banking office opened in San Antonio in June 2002, the new energy lending
division

                                        7

<PAGE>

established during the first quarter of 2002 and the trading department
established in the second quarter of 2001. Salaries and employee benefits
expenses in the commercial banking segment for 2001 totaled $55.1 million, an
increase of $10.5 million or 23.4% over $44.7 million for 2000. Increased
salaries and employee benefits expenses related to the acquisition of the
CaminoReal Bank offices since acquisition were $4.0 million. The increase is
also attributable to the hiring of personnel for two de novo offices (Dallas and
Deer Park) as well as new central departments such as internet banking, document
imaging and community affairs. Additionally, medical insurance expense increased
$1.2 million during 2001.

Professional fees relating to commercial banking in 2002 totaled $4.2 million,
an increase of $1.2 million or 41.8% from $3.0 million in 2001. This increase is
the primarily due to $906,000 of computer software consulting fees related to
the trustee deposits held by the Bank. Additionally the Company incurred
expenses of $109,000 in the second quarter of 2002 related to its 401(k) plan
conversion.

Minority interest expense increased $1.2 million or 25.4% from 2001 as compared
to 2002 and $2.0 million or 76.8% from 2000 as compared to 2001. The increases
are related to the interest on the additional trust preferred securities issued
in September 2002, August 2002 and March 2001. Please refer to the subsequent
discussion of "Company-Obligated Mandatorily Redeemable Trust Preferred
Securities" for additional details of the issuances.

In 2002, the Company recorded $822,000 in conversion costs related to the
acquisition of Eagle National. Conversion costs in 2001 related to the
acquisition of Community Bancshares, Inc. in December 2001, Lone Star
Bancshares, Inc. in August 2001 and CaminoReal Bancshares in March 2001 totaled
$957,000, $1.2 million and $1.0 million, respectively. The costs include
retention and severance expenses as well as data processing costs related to the
conversions of the acquired banks' systems.

Other expenses in the commercial banking segment totaled $16.9 million in 2002,
an increase of $2.1 million or 13.9%, from $14.9 million in 2001. Due to the
adoption of SFAS 142, amortization of the goodwill presently on the Company's
books was terminated January 1, 2002. Amortization of goodwill expensed in 2001
was $767,000. The Company incurred $1.4 million in noncash charges related to
the early redemption of its trust preferred securities in November 2002.
Amortization in 2002 of the core deposit intangible related to the acquisition
of Community Bank and Eagle National Bank was $426,000. Other expenses in the
commercial banking segment totaled $14.9 million in 2001, an increase of $3.1
million or 26.1%, from $11.8 million in 2000. The increase in goodwill
amortization recorded in 2001 related to the CaminoReal Bancshares acquisition
was $583,000. Also, charges related to the new debit card program increased
$252,000 from 2000.

MORTGAGE BANKING SEGMENT. Noninterest expense for the mortgage banking segment
for 2002 was $59.0 million, as compared to $26.6 million for 2001, an increase
of $32.4 million or 121.7%. The increase in expenses is due to variable expenses
related to the increase in loan fundings and the opening of thirty-six new
locations in 2002. Employees increased from 622 in 2001 to 1,100 in 2002. Also
based upon an outside valuation of the mortgage servicing rights, an impairment
of $9.5 million was recorded in 2002. The impairment of mortgage servicing
rights is a result of the decline in mortgage interest rates and an increase in
prepayments of mortgages which are serviced by SCMC due to a favorable interest
rate environment which led to increased loan refinancing and new loan activity.
Noninterest expense for the mortgage banking segment for 2001 was $26.6 million,
as compared to $16.7 million for 2000, an increase of $9.9 million or 59.2%.
This increase in noninterest expense is primarily due to the favorable interest
rate environment which led to increased loan refinancing and new loan activity.
In addition, new retail locations were opened in 2001.

INCOME TAXES

The Company provided $18.1 million for federal income taxes for 2002, $16.4
million for 2001, and $12.6 million for 2000. The effective tax rates for 2002,
2001, and 2000 were 33.1%, 35.1%, and 31.5%, respectively.

                                        8

<PAGE>

FINANCIAL CONDITION

LOANS HELD FOR INVESTMENT

At December 31, 2002, loans held for investment totaled $1.9 billion, an
increase of $276.8 million or 16.6% over loans at December 31, 2001 of $1.7
billion. Loans acquired as a result of the acquisition of Eagle National in
September 2002 totaled $64.4 million.

At December 31, 2002, loans held for investment were 72.7% of deposits and 54.2%
of total assets. At December 31, 2001, loans held for investment were 73.5% of
deposits and 60.0% of total assets.

The following table summarizes the loan portfolio of the Bank by type of loan as
of December 31 of the year indicated, excluding loans held for sale (in
thousands):

<TABLE>
<CAPTION>
                             2002 (RESTATED)            2001                 2000                 1999                1998
                           ------------------    ------------------   ------------------   ------------------  -----------------
                             AMOUNT       %        AMOUNT       %        AMOUNT      %        AMOUNT      %      AMOUNT      %
                           -----------  -----    -----------  -----   -----------  -----   -----------  -----  ---------   -----
<S>                        <C>          <C>      <C>          <C>     <C>          <C>     <C>          <C>    <C>         <C>
Commercial, financial
 and industrial:
  US addressees            $   585,685   30.1%   $   506,272   30.4%  $   472,392   35.1%  $   436,518   36.7% $ 357,872    36.0%
  Non-US addressees              7,207    0.4%         7,594    0.5%        4,807    0.4%        5,917    0.5%     4,047     0.4%
Real estate mortgage:
  Commercial                   626,132   32.2%       530,076   31.8%      449,007   33.4%      360,092   30.2%   273,067    27.4%
  Residential                  201,238   10.4%       186,527   11.2%      155,796   11.5%      141,661   11.9%   122,252    12.3%
Real estate construction       371,207   19.1%       282,304   16.9%      134,482   10.0%      115,761    9.7%   114,502    11.5%
Consumer                       152,092    7.8%       154,015    9.2%      129,358    9.6%      130,920   11.0%   123,057    12.4%
                           -----------  -----    -----------  -----   -----------  -----   -----------  -----  ---------   -----
                           $ 1,943,561  100.0%   $ 1,666,788  100.0%  $ 1,345,842  100.0%  $ 1,190,869  100.0% $ 994,797   100.0%
                           ===========  =====    ===========  =====   ===========  =====   ===========  =====  =========   =====
</TABLE>

The primary lending focus of the Bank is on commercial loans and owner-occupied
real estate loans to local businesses with annual sales ranging from $300,000 to
$30 million. Typically, the Bank's customers have financing requirements between
$50,000 and $500,000. The Bank's legal lending limit was $20 million at December
31, 2002 and was not exceeded by any single relationship.

The Bank makes commercial loans primarily to small and medium-sized businesses
and to professionals. The Bank offers a variety of commercial loan products
including revolving lines of credit, letters of credit, working capital loans,
and loans to finance accounts receivable, inventory and equipment. Typically,
the Bank's commercial loans have floating rates of interest, are for varying
terms (generally not exceeding three years), are personally guaranteed by the
business owner and are secured by accounts receivable, inventory and/or other
business assets. In addition to the commercial loans secured solely by non-real
estate business assets, the Bank makes commercial loans that are secured by
owner-occupied real estate, as well as other business assets.

The Bank's commercial mortgage loans are secured by first liens on real estate,
typically have floating interest rates, and are amortized over a 15-year period
with balloon payments due at the end of three years. In underwriting commercial
mortgage loans, consideration is given to the property's operating history,
future operating projections, current and projected occupancy, location and
physical condition. The underwriting analysis also includes credit checks,
appraisals, and a review of the financial condition of the borrower.

The Bank makes loans to finance the construction of residential and, to a lesser
extent, nonresidential properties, such as churches. Generally, construction
loans are secured by first liens on real estate and have floating interest
rates. The Bank conducts periodic inspections, either directly or through an
architect or other agent, prior to approval of periodic draws on these loans.
Underwriting guidelines similar to those described above are also used in the
Bank's construction lending activities.

The Bank makes automobile, boat, home improvement and other loans to consumers.
These loans are primarily made to customers who have other relationships with
the Bank. During the first quarter of 2000, the Bank sold its credit card
portfolio to a correspondent bank.

The Bank seeks to compete effectively in its chosen markets by consistent
application of its business strategy. See further discussion of "BUSINESS -
Business Banking Strategy" and "BUSINESS - Competition".

                                        9
<PAGE>

Loan maturities and rate sensitivity of the loan portfolio, excluding real
estate - mortgage, consumer and foreign loans and unearned discount at December
31, 2002 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                           DUE AFTER
                                                           ONE YEAR
                                           DUE IN ONE    THROUGH FIVE    DUE AFTER
                                          YEAR OR LESS      YEARS        FIVE YEARS        TOTAL
                                         --------------  ------------    -----------    -------------
<S>                                      <C>             <C>             <C>            <C>
Commercial, financial and industrial     $      461,888  $    122,367    $     4,054    $     588,309
Real estate - commercial                        374,434       230,263         22,900          627,597
Real estate - construction                      295,166        68,945          6,249          370,360
Foreign loans                                     6,835         1,094          1,721            9,650
                                         --------------  ------------    -----------    -------------
Total loans                              $    1,138,323  $    422,669    $    34,924    $   1,595,916
                                         ==============  ============    ===========    =============

Loans with a fixed interest rate         $      130,683  $    418,037    $    34,924    $     583,644
Loans with a floating interest rate           1,007,640         4,632              -        1,012,272
                                         --------------  ------------    -----------    -------------
Total loans                              $    1,138,323  $    422,669    $    34,924    $   1,595,916
                                         ==============  ============    ===========    =============
</TABLE>

As of December 31, 2002, there was no concentration of loans to any one type of
industry exceeding 10% of total loans nor were there any loans classified as
highly leveraged transactions.

LOANS HELD FOR SALE

Loans held for sale totaled $701.3 million at December 31, 2002, an increase
from $261.5 million at December 31, 2001. The $439.8 million, or 168.2%,
increase is due to the increase in loans funded by the Bank through an
intercompany mortgage warehouse line of credit with SCMC. Mortgage loans
originated by SCMC are held for sale and are typically sold to investors within
one month of origination. Due to the timing of the sales of loans to investors,
the balance of these loans at any given time is somewhat volatile. Loan fundings
by SCMC increased $1.8 billion from $2.6 billion funded in 2001 to $4.5 billion
funded in 2002.

RISK ELEMENTS

Nonperforming, past due, and restructured loans are fully or substantially
secured by assets, with any excess of loan balances over collateral values
specifically allocated in the allowance for credit losses. The Bank receives, on
an ongoing basis, 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 credit losses.

The Bank defines potential problem loans as those loans not classified as
nonperforming, but where information known by management indicates serious doubt
that the borrower will be able to comply with the present payment terms.
Management identifies these loans through its continuous loan review process and
classifies potential problem loans as those loans graded as substandard,
doubtful, or loss, excluding all nonperforming loans. The Bank's increase in
potential problem loans can be directly attributed to acquisitions, loan growth
and economic conditions.

The Bank had no material foreign loans outstanding or loan concentrations for
the years ended December 31, 1998 through 2002. The Bank, however, continues to
monitor the potential risk of foreign borrowers and concentrations of credit.

                                       10
<PAGE>

The following table presents information regarding non-performing loans and
assets as of December 31, 2002, 2001, 2000, 1999, and 1998 (in thousands):

<TABLE>
<CAPTION>
                                                   2002            2001             2000          1999           1998
                                               -------------   -------------    -----------   ------------   ------------
<S>                                            <C>             <C>              <C>           <C>            <C>
Nonaccrual loans                               $      19,654   $      14,179    $     8,297   $      5,871   $      5,158
Restructured loans                                         -              16          1,298            218            312
                                               -------------   -------------    -----------   ------------   ------------
Total nonperforming loans                             19,654          14,195          9,595          6,089          5,470
Real estate acquired by foreclosure                    3,358           1,837          1,702          1,323          1,969
Other repossessed assets                                  66             127            192            264            356
                                               -------------   -------------    -----------   ------------   ------------
Total nonperforming assets                     $      23,078   $      16,159    $    11,489   $      7,676   $      7,795
                                               =============   =============    ===========   ============   ============


Nonperforming loans to total loans                      0.74%           0.74%          0.65%          0.48%          0.51%
Nonperforming assets to total assets                    0.64%           0.58%          0.55%          0.37%          0.49%

Potential problem loans                        $      62,189   $      51,456    $    38,753   $     25,565   $     21,983
                                               =============   =============    ===========   ============   ============

Accruing loans past due 90 days or more        $         984   $       1,360            626            351            824
                                               =============   =============    ===========   ============   ============
Total loans                                    $   2,644,862   $   1,928,293    $ 1,484,990   $  1,261,273   $  1,079,657
                                               =============   =============    ===========   ============   ============
Total assets                                   $   3,582,745   $   2,778,090    $ 2,077,214   $  2,060,112   $  1,591,284
                                               =============   =============    ===========   ============   ============
</TABLE>

ALLOWANCE FOR CREDIT LOSSES

The Bank has several systems in place to assist in maintaining the overall
quality of its loan portfolios. The Bank has established underwriting guidelines
to be followed by its bank officers. The Bank also monitors its delinquency
levels for any negative or adverse trends and particularly monitors credits
which have a total exposure of $50,000 or more. However, there can be no
assurance that the Bank's loan portfolios will not become subject to increasing
pressures from deteriorating borrower creditworthiness due to general economic
conditions.

The allowance for credit losses is a reserve established through charges to
earnings in the form of a provision for credit losses. Based on an evaluation of
the loan portfolio, management presents a quarterly review of the allowance for
credit losses to the Bank's Board of Directors, indicating any changes in the
allowance since the last review and any recommendations as to adjustments in the
allowance. In making its evaluation, management considers the industry
diversification of the Bank's commercial loan portfolio and the effect of
changes in the local real estate market on collateral values. The Bank also
considers the results of recent regulatory examinations. The Bank continues to
monitor the effects of current economic indicators and their probable impact on
borrowers, the amount of charge-offs for the period, the amount of
non-performing loans and related collateral security. The Bank monitors the loan
portfolio through its internal loan review department. Charge-offs occur when
loans are deemed to be uncollectible.

The Bank follows a loan review program to evaluate the credit risk in the
commercial loan portfolio for substantially all commercial loans and real estate
loans. Through the loan review process, the Bank maintains an internally
classified loan list, which, along with the delinquency list of loans, helps
management assess the overall quality of the loan portfolios and the adequacy of
the allowance for credit losses. Loans classified as "substandard" are those
loans with clear and defined weaknesses such as highly leveraged positions,
unfavorable financial ratios, uncertain repayment sources or poor financial
condition, which may jeopardize recoverability of the debt.

Loans classified as "doubtful" are those loans which have characteristics
similar to substandard accounts but with an increased risk that a loss may
occur, or at least a portion of the loan may require a charge-off if liquidated
at present. Although loans classified as substandard do not duplicate loans
classified as doubtful, both substandard and doubtful loans include some loans
that are delinquent at least 30 days or on nonaccrual status. Loans classified
as "loss" are those loans that are in the process of being charged off.

                                       11
<PAGE>

At December 31, 2002, substandard loans totaled $79.9 million, of which $17.9
million were loans designated as delinquent or nonaccrual; and doubtful loans
totaled $2.0 million of which $1.5 million were designated as delinquent or
nonaccrual.

In addition to the internally classified loan list and delinquency list of
loans, the Bank maintains a separate "watch list" which further aids the Bank in
monitoring loan portfolios. Watch list loans show warning elements where the
present status portrays one or more deficiencies that require attention in the
short run or where pertinent ratios of the loan account have weakened to a point
where more frequent monitoring is warranted. These loans do not have all the
characteristics of a classified loan (substandard or doubtful) but do show
weakened elements as compared with those of a satisfactory credit. The Bank
reviews these loans to assist in assessing the adequacy of the allowance for
credit losses. As of December 31, 2002, watch list loans totaled $123.7 million.

Management assigns loan grades by loan and allocations are made within each loan
grade so that double allocations are avoided. Loans are assigned a grade
according to payment history, collateral values, and financial condition of the
borrower.

The Bank maintains an adequate allowance for credit losses through its watchlist
classifications, allocating an increasing reserve amount as the severity of a
problem loan increases. The Bank maintains an unallocated reserve for
satisfactory non-classified credits based on the average of the last three
year's actual net charge-offs.

The Company has formed a sub-committee for Asset Quality in 1999 which meets
eight times each year. That committee is composed of three outside members of
the Company's Board of Directors and five senior members of the Bank's
management. This committee reviews all large loans, past-dues, and overdrafts,
as well as ratio and trend analysis and approves all charge-offs over $25,000.
This committee also mandates action items for future meetings to evaluate
potential problems and assess the potential need for additional reserve
requirements by any particular sector.

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

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                               -------------------------------------------------------------------------
                                                   2002            2001            2000           1999           1998
                                               -------------   -------------    -----------   ------------   ------------
<S>                                            <C>             <C>              <C>           <C>            <C>
Average loans outstanding                      $   2,197,875   $   1,693,867    $ 1,331,282   $  1,122,834   $    991,769
                                               =============   =============    ===========   ============   ============
Loans outstanding at period-end                $   2,644,862   $   1,928,293    $ 1,484,990   $  1,261,273   $  1,079,657
                                               =============   =============    ===========   ============   ============

Allowance for credit losses at January 1       $      22,927   $      16,862    $    13,998   $     11,352   $      8,820

Charge-offs:
   Commercial, financial, and industrial               7,384           6,969          7,061          5,485          2,723
   Real estate, mortgage and construction              3,198           1,057            643            162            510
   Consumer                                            1,122           1,797             63          1,925          1,134
                                               -------------   -------------    -----------   ------------   ------------
      Total charge-offs                               11,704           9,823          7,767          7,572          4,367
Recoveries:
   Commercial, financial, and industrial               1,400             871            861            750            229
   Real estate, mortgage and construction                 79             111             33             42            120
   Consumer                                              245             464             69            190            275
                                               -------------   -------------    -----------   ------------   ------------
      Total recoveries                                 1,724           1,446            963            982            624
                                               -------------   -------------    -----------   ------------   ------------
Net charge-offs                                        9,980           8,377          6,804          6,590          3,743

Acquired allowance for credit losses                     656           2,758              -              -              -
Provision for credit losses                           14,018          11,684          9,668          9,236          6,275
                                               -------------   -------------    -----------   ------------   ------------
Allowance for credit losses at December 31     $      27,621   $      22,927    $    16,862   $     13,998   $     11,352
                                               =============   =============    ===========   ============   ============
Ratios:
   Allowance to average loans                           1.26%           1.35%          1.27%          1.25%          1.14%
   Allowance to period end loans                        1.04%           1.19%          1.14%          1.11%          1.05%
   Net charge-offs to average loans                     0.45%           0.49%          0.51%          0.59%          0.38%
   Allowance to period-end nonperforming loans        140.54%         161.51%        175.74%        229.89%        207.53%
</TABLE>

                                       12
<PAGE>

ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES

The following table describes the allocation of the allowance for credit losses
among various categories of loans and certain other information as of the dates
indicated. The allocation is made for analytical purposes and is not necessarily
indicative of the categories in which future loan losses may occur. The total
allowance is available to absorb losses from any category of loans.

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                                     (IN THOUSANDS)
                           --------------------------------------------------------------------------------------------------------
                                  2002                 2001                 2000                  1999                 1998
                           -------------------  -------------------  -------------------   -------------------  -------------------
                                       % OF                 % OF                 % OF                  % OF                  % OF
                                     CATEGORY             CATEGORY             CATEGORY              CATEGORY             CATEGORY
                                     TO LOANS             TO LOANS             TO LOANS              TO LOANS             TO LOANS
                                     HELD FOR             HELD FOR             HELD FOR              HELD FOR             HELD FOR
                            AMOUNT  INVESTMENT   AMOUNT  INVESTMENT   AMOUNT  INVESTMENT   AMOUNT   INVESTMENT   AMOUNT  INVESTMENT
                           -------  ----------  -------  ----------  -------  ----------   ------   ----------  -------  ----------
<S>                        <C>      <C>         <C>      <C>         <C>      <C>          <C>      <C>         <C>      <C>
Balance of allowance
  for credit losses at end
  of period applicable to:

Commercial, financial
  and industrial           $ 9,188      30%     $ 8,361       31%    $ 7,521       35%    $ 5,461        37%    $ 3,548      37%
Real estate, mortgage
  and construction           8,111      62%       5,538       60%      3,348       55%      3,014        52%      1,712      51%
Consumer                     1,323       8%         868        9%      1,073       10%        909        11%        770      12%
Unallocated                  8,999     N/A        8,160      N/A       4,920      N/A       4,614       N/A       5,322     N/A
                           ---------------      ----------------     ----------------     -----------------     ---------------
                           $27,621     100%     $22,927      100%    $16,862      100%    $13,998       100%    $11,352     100%
                           ===============      ================     ================     =================     ===============
</TABLE>

SECURITIES

The following table summarizes the book value of securities held by the Bank as
of the dates shown. See Note D to the Company's consolidated financial
statements for information relating to fair values and details of
held-to-maturity and available-for-sale securities portfolios.

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                                        (IN THOUSANDS)
                                            ---------------------------------------------------------------------
                                              2002          %          2001          %          2000          %
                                            --------      -----      --------      -----      --------      -----
<S>                                         <C>           <C>        <C>           <C>        <C>           <C>
U.S. Treasury securities and
  obligations of U.S. government
  agencies                                  $ 39,388       12.6%     $ 28,937        8.8%     $ 36,120       12.2%
Obligations of states and political
  subdivisions                                60,823       19.4%       74,985       22.8%       79,065       26.8%
Mortgage-backed securities and
  collateralized mortgage obligations        189,560       60.6%      220,355       66.9%      180,207       61.0%
Other securities                              23,283        7.4%        5,139        1.5%            -          -
                                            ---------------------------------------------------------------------
                                            $313,054      100.0%     $329,416      100.0%     $295,392      100.0%
                                            =====================================================================
</TABLE>

At December 31, 2002, securities of $313.1 million decreased $16.4 million from
$329.4 million at December 31, 2001. At December 31, 2002 and 2001, securities
represented 12.4% and 15.4% of total deposits and 8.7% and 11.9% of total
assets, respectively.

The yield on the Bank's securities portfolio at December 31, 2002, was 4.7%. At
December 31, 2002, the weighted-average life of the portfolio was approximately
2.3 years and the duration was approximately 1.7 years. The yield on the Bank's
securities portfolio at December 31, 2001, was 5.8%. At December 31, 2001, the
weighted-average life of the portfolio was approximately 2.8 years and the
duration was approximately 2.0 years.

                                       13


<PAGE>

The contractual maturity distribution and weighted average yield of the Bank's
security portfolio as of December 31, 2002 are summarized in the following table
(in thousands). No tax equivalent adjustments were made.

<TABLE>
<CAPTION>
                                 DUE < 1 YEAR           DUE 1-5 YEARS         DUE 5-10 YEARS         DUE > 10 YEARS
                             -------------------    --------------------   -------------------    -------------------
                              AMOUNT       YIELD     AMOUNT        YIELD    AMOUNT       YIELD     AMOUNT       YIELD     TOTAL
                             --------      -----    --------       -----   --------      -----    --------      -----    --------
<S>                          <C>           <C>      <C>            <C>     <C>           <C>      <C>           <C>      <C>
Obligations of
 U.S. government
 agencies                    $ 16,329       4.31%   $ 23,059        3.81%  $      -          -    $      -          -    $ 39,388
Obligations of
 states and political
 subdivisions                  19,577       6.05%     24,747        6.69%    16,440       6.72%         59       8.50%     60,823
Mortgage-backed
 securities and
 collateralized
 mortgage obligations             892       5.16%      6,020        4.67%     9,383       7.28%    173,265       4.87%    189,560
Other securities               23,283       4.71%          -           -          -          -           -          -      23,283
                             --------       ----    --------       -----   --------       ----    --------       ----    --------
                             $ 60,081       5.04%   $ 53,826       5.23%   $ 25,823       6.92%   $173,324       4.87%   $313,054
                             ========       ====    ========       =====   ========       ====    ========       ====    ========
</TABLE>

DEPOSITS

The Bank's investing activities and loans held for investment are funded
primarily by core deposits, approximately 82.6% of which are total deposits
excluding time deposits over $100,000. Noninterest bearing deposits at December
31, 2002 were $1.02 billion as compared to $797.9 million at December 31, 2001,
an increase of $219.0 million or 27.4% of which $11.8 million related to the
acquisition of Eagle National Bank. Approximately 38.0% of deposits from at
December 31, 2002 were noninterest bearing.

The Bank's average total deposits for 2002 were $2.4 billion, which is $360.2
million or 17.9% over average total deposits during 2001 of $2.0 billion. The
increase in the Bank's average total deposits is primarily attributable to the
acquisition of Community Bancshares in December 2001 and ENB Bankshares in
September 2002. Deposits acquired with Community Bankshares and ENB Bankshares
totaled $114.2 million and $58.0 million, respectively. Deposit growth continues
to be concentrated primarily in core deposits, consisting of all deposits other
than retail and public fund certificates of deposit in excess of $100,000. The
Bank's average total deposits for 2001 were $2.0 billion, which is $412.3
million or 25.8% over average total deposits during 2000 of $1.6 billion. A
portion of the increase in the Bank's average total deposits is attributable to
acquisitions. Deposits acquired in 2001 with CaminoReal Bancshares and Community
Bancshares totaled $248.8 million and $114.2 million, respectively. The Bank
began accepting brokered certificates of deposit in 2002. Average brokered
certificates of deposit totaled $34.9 million in 2002.

The average balances and weighted average rates paid on deposits for each of the
years ended December 31, 2002, 2001, and 2000 are presented below (in
thousands):

<TABLE>
<CAPTION>
                                                       2002 (RESTATED)                2001                      2000
                                                  ------------------------   ---------------------      --------------------
                                                    AVERAGE        AVERAGE      AVERAGE    AVERAGE        AVERAGE    AVERAGE
                                                    BALANCE          RATE       BALANCE      RATE         BALANCE      RATE
                                                  -----------      -------   ------------  -------      -----------  -------
<S>                                               <C>              <C>       <C>           <C>          <C>          <C>
Noninterest bearing demand deposits               $   844,401                $    678,134               $   536,351
Interest bearing demand and savings deposits          887,544        0.96%        784,054    2.16%          621,038    3.20%
Time deposits                                         638,048        2.74%        547,600    4.77%          440,062    5.51%
                                                  -----------        ----    ------------    ----       -----------    ----
                                                  $ 2,369,993        1.71%   $  2,009,788    3.23%      $ 1,597,451    4.16%
                                                  ===========        ====    ============    ====       ===========    ====
</TABLE>

                                       14
<PAGE>

The Bank's time deposits of $100,000 or more have consistently shown a pattern
of renewal similar to that for deposits of less than $100,000. The remaining
maturities of certificates of deposits of $100,000 or more as of December 31,
2002 are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                           2002
                                       -----------
                                        (Restated)
<S>                                    <C>
Three months or less                   $   239,661
Over three through six months              103,832
Over six through twelve months              81,420
Thereafter                                  52,024
                                       -----------
                                       $   476,937
                                       ===========
</TABLE>

OTHER BORROWED FUNDS

Deposits are the primary source of funds for the Bank's lending and investment
activities and for its general business purposes. Additionally, the Bank has
available borrowing facilities through the Federal Home Loan Bank and numerous
correspondent banking relationships.

NOTES PAYABLE

The Company has entered into a Credit Agreement with Wells Fargo Bank Minnesota,
National Association ("Wells Fargo") dated February 2, 2002, as amended by the
First Amendment to Credit Agreement dated February 2, 2003 between the Company
and Wells Fargo Bank, National Association, successor by assignment to Wells
Fargo Bank Minnesota, National Association (as amended, the "Credit Agreement").
Pursuant to the Credit Agreement, the Company has borrowed $20 million which is
evidenced by the Term Note dated February 2, 2003. The Term Note bears interest
at a rate per annum of 1.95% above the federal funds rate in effect from time to
time. The federal funds rate is a fluctuating interest rate per annum set daily
by Wells Fargo as the rate at which funds are offered to Wells Fargo by federal
funds brokers. The indebtedness evidenced by the Term Note is repayable in
quarterly installments with a final maturity date of February 1, 2006. The
Credit Agreement requires the Company and the Bank to maintain certain financial
ratios and includes other restrictive covenants. Included within these financial
covenants is a covenant requiring the Bank to maintain its categorization as
"well capitalized." At December 31, 2002, the most recent report filed by the
Bank categorized it as "adequately capitalized" under applicable regulatory
requirements. Wells Fargo has provided to the Company a written waiver with
respect this financial covenant which is effective through March 31, 2003.

COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES

With the proceeds received by the Company from the sale of its 8.30% Junior
Subordinated Debentures to Trust III on September 26, 2002, the Company, on
November 1, 2002, prepaid all $29,639,200 of the 9.28% Junior Subordinated
Deferrable Interest Debentures previously issued by the Company to Sterling
Bancshares Capital Trust I ("Trust I"). Upon the prepayment, the 9.28% Trust
Preferred Securities and the 9.28% Trust Common Securities issued by Trust I
were mandatorily redeemed. In each case, the redemption was made at par, plus
the accrued and unpaid distributions through November 1, 2002.

On September 26, 2002, Sterling Bancshares Capital Trust III ("Trust III"), a
trust formed under the laws of the State of Delaware in February 2001, issued
$31,250,000 of 8.30% Trust Preferred Securities and invested the proceeds
thereof in the 8.30% Junior Subordinated Deferrable Interest Debentures (the
"8.30% Junior Subordinated Debentures") issued by the Company. The 8.30% Junior
Subordinated Debentures will mature on September 26, 2032, which date may be
shortened to a date not earlier than September 26, 2007 if certain conditions
are met (including the Company having received prior approval of the Federal
Reserve and any other required regulatory approvals). The 8.30% Trust Preferred
Securities will be subject to mandatory redemption in a like amount
contemporaneously with the optional prepayment of the 8.30% Junior Subordinated
Debentures by the Company. The 8.30% Junior Subordinated Debentures may be
prepaid upon the occurrence and continuation of certain events including a
change in the tax status or regulatory capital treatment of the 8.30% Trust
Preferred Securities. In each case, redemption will be made at a price equal to
100% of the face amount of

                                       15
<PAGE>

the 8.30% Trust Preferred Securities, plus the accrued and unpaid distributions
thereon through the redemption date.

In August 2002, the Company formed Sterling Bancshares Statutory Trust One, a
trust formed under the laws of the State of Connecticut ("Statutory Trust One").
On August 30, 2002, Statutory Trust One completed a private placement of
$20,000,000 of Floating Rate Trust Preferred Securities to an institutional
buyer. The proceeds from the sale were invested in the Floating Rate Junior
Subordinated Deferrable Interest Debentures issued by the Company. The Floating
Rate Trust Preferred Securities and the Floating Rate Junior Subordinated
Deferrable Interest Debentures have a floating rate equal to the three-month
LIBOR plus 3.45%, which resets quarterly. For the first five years, there is a
ceiling on the three-month LIBOR of 8.50% resulting in a ceiling on the floating
rate of 11.95% during this period. As of December 31, 2002, the rate was 4.85%.
The Floating Rate Junior Subordinated Debentures will mature on August 30, 2032,
which date may be shortened to a date not earlier than August 30, 2007 if
certain conditions are met (including the Company having received prior approval
of the Federal Reserve and any other required regulatory approvals). The
Floating Rate Trust Preferred Securities will be subject to mandatory redemption
in a like amount contemporaneously with the optional prepayment of the Floating
Rate Junior Subordinated Deferrable Interest Debentures by the Company. The
Floating Rate Junior Subordinated Deferrable Interest Debentures may be prepaid
upon the occurrence and continuation of certain events including a change in the
tax status or regulatory capital treatment of the Floating Rate Trust Preferred
Securities. In each case, redemption will be made at a price equal to 100% of
the face amount of the Floating Rate Trust Preferred Securities, plus the
accrued and unpaid distributions thereon through the redemption date.

In February 2001, the Company formed Sterling Bancshares Capital Trust II
("Trust II") and Trust III, each a trust formed under the laws of the State of
Delaware. On March 21, 2001, Trust II issued $28,750,000 of 9.20% Trust
Preferred Securities and invested the proceeds thereof in the 9.20% Junior
Subordinated Deferrable Interest Debentures (the "9.20% Junior Subordinated
Debentures") issued by the Company. The 9.20% Junior Subordinated Debentures
will mature on March 21, 2031, which date may be shortened to a date not earlier
than March 21, 2006 if certain conditions are met (including the Company having
received prior approval of the Federal Reserve and any other required regulatory
approvals). The 9.20% Trust Preferred Securities will be subject to mandatory
redemption in a like amount contemporaneously with the optional prepayment of
the 9.20% Junior Subordinated Debentures by the Company. The 9.20% Junior
Subordinated Debentures may be prepaid upon the occurrence and continuation of
certain events including a change in the tax status or regulatory capital
treatment of the 9.20% Trust Preferred Securities. In each case, redemption will
be made at a price equal to 100% of the face amount of the 9.20% Trust Preferred
Securities, plus the accrued and unpaid distributions thereon through the
redemption date.

INTEREST RATE SENSITIVITY AND LIQUIDITY

The Company manages its interest rate risk through structuring the balance sheet
to maximize net interest income while maintaining an acceptable level of risk to
changes in market interest rates. This process requires a balance between
profitability, liquidity, and interest rate risk.

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

An interest rate sensitive asset or liability is one that, within a defined time
period, either matures or experiences an interest rate change in line with
general market interest rates. The management of interest rate risk is performed
by analyzing the maturity and repricing relationships between interest earning
assets and interest bearing liabilities at specific points in time ("GAP") and
by analyzing the effects of interest rate changes on net interest income over
specific periods of time by projecting the performance of the mix of assets and
liabilities in varied interest rate environments. Interest rate sensitivity
reflects the potential effect on net interest income of a movement in interest
rates. A company is considered to be asset sensitive, or having a positive GAP,
when the

                                       16
<PAGE>
amount of its interest earning assets maturing or repricing within a given
period exceeds the amount of its interest bearing liabilities also maturing or
repricing within that time period. Conversely, a company is considered to be
liability sensitive, or having a negative GAP, when the amount of its interest
bearing liabilities maturing or repricing within a given period exceeds the
amount of its interest earning assets also maturing or repricing within that
time period. During a period of rising interest rates, a negative GAP would tend
to adversely affect net interest income, while a positive GAP would tend to
result in an increase in net interest income. During a period of falling
interest rates, a negative GAP would tend to result in an increase in net
interest income, while a positive GAP would tend to affect net interest income
adversely. When analyzing its GAP position, the Company emphasizes the next
twelve-month period.

The Company's net interest income is positioned to benefit from rising
short-term rates due to an asset sensitive position. The Company would likely
benefit from an increase in short-term interest rates as this might signify that
economic conditions are improving. In addition, an increase in short-term
interest rates would likely affect the Company's fixed-rate/variable-rate
product origination mix and origination volumes and would likely slow
prepayments. However, even in the current interest rate environment, the
Company's loan demand remains strong. Also, management continues to evaluate the
Company's lending rates and those rates may not be adjusted downward on a basis
that is entirely consistent with short term interest rate trends should such
trends reflect a further decrease in rates.

While this asset sensitivity may compress net interest income in the short-term
or if the current interest rate environment continues for an extended period of
time, the Company believes this asset sensitive is justified because current
rates are well below historical averages and, consequently, there is a greater
possibility over time of higher interest rates versus lower interest rates.
However, if interest rates remain stable or decrease, the Company could continue
to experience an increase in prepayments of commercial loans, mortgage-backed
securities and, with respect to SCMC, mortgage servicing rights and may
experience further compression of net interest margin or net interest income.

As mentioned, the Company utilizes simulation models to estimate the impact on
net interest income of changes in interest rates under various scenarios. Based
on simulation analysis of the interest rate sensitivity inherent in the
Company's net interest income and market value of portfolio equity, as of
December 31, 2002 and as adjusted by instantaneous rate changes upward and
downward of up to 100 basis points, the Company is slightly asset sensitive. The
Company's analysis indicates that an instantaneous 100 basis point move downward
in interest rates would decrease net interest income by 5.11% and decrease the
present value of equity by 4.90%; likewise, an instantaneous 100 basis point
move upward in interest rates would increase net interest income by 5.05% and
increase the present value of equity by 4.12%. These sensitivities are all
within the threshold set by the Company's Asset/Liability Committee. Each rate
scenario reflects unique prepayment and repricing assumptions. Since there are
limitations inherent in any methodology used to estimate the exposure to changes
in market interest rates, this analysis is not intended to be a forecast of the
actual effect of a change in market interest rates on the Company. The Company's
interest rate sensitivity analysis includes assumptions that (i) the composition
of the Company's interest sensitive assets and liabilities existing at fiscal
year end will remain constant over the measurement period; and (ii) that changes
in market rates are parallel and instantaneous across the yield curve regardless
of duration or repricing characteristics of specific assets or liabilities.
Further, the analysis does not contemplate any actions that the Company might
undertake in response to changes in market interest rates. Accordingly, this
analysis is not intended to and does not provide a precise forecast of the
effect actual changes in market rates will have on the Company.

                                       17
<PAGE>

The following table sets forth the expected maturity and repricing
characteristics of the Company's interest earning assets and interest bearing
liabilities as of December 31, 2002:

<TABLE>
<CAPTION>
                                                 0-90         90-365         1-3            3-5          OVER
                                                 DAYS          DAYS         YEARS          YEARS        5 YEARS       TOTAL
                                             -----------    ----------    ----------    ----------    ----------    ----------
                                                          (In thousands, except for data expressed in percentages)
<S>                                          <C>            <C>           <C>           <C>           <C>           <C>
INTEREST EARNING ASSETS:
Cash and cash equivalents                    $     6,037    $        -    $        -    $        -    $        -    $    6,037
Deposits in other financial institutions             217            99           697            99           190         1,302
Trading assets                                   142,803             -             -             -             -       142,803
Securities                                        54,687        74,054        68,872        45,180        70,261       313,054
Loans                                          1,833,471       143,406       297,118       302,847        68,020     2,644,862
                                             -----------    ----------    ----------    ----------    ----------    ----------
  Total interest earning assets                2,037,215       217,559       366,687       348,126       138,471     3,108,058

INTEREST BEARING LIABILITIES:
Demand and savings deposits                      919,477             -             -             -             -       919,477
Certificates of deposit and
  other time deposits                            336,810       214,295       122,119        63,553             -       736,777
Other borrowed funds                             509,590             -             -             -             -       509,590
Notes payable                                     21,070             -           360             -             -        21,430
                                             -----------    ----------    ----------    ----------    ----------    ----------
  Total interest bearing liabilities           1,786,947       214,295       122,479        63,553             -     2,187,274
                                             -----------    ----------    ----------    ----------    ----------    ----------

Period GAP                                   $   250,268    $    3,264    $  244,208    $  284,573    $  138,471    $  920,784
                                             ===========    ==========    ==========    ==========    ==========    ==========

Cumulative GAP                               $   250,268    $  253,532    $  497,740    $  782,313    $  920,784
                                             ===========    ==========    ==========    ==========    ==========

Period GAP to total assets                          6.99%         0.09%         6.82%         7.94%         3.86%
                                             ===========    ==========    ==========    ==========    ==========
Cumulative GAP to total assets                      6.99%         7.08%        13.89%        21.84%        25.70%
                                             ===========    ==========    ==========    ==========    ==========
</TABLE>

Shortcomings are inherent in any GAP analysis since certain assets and
liabilities may not reprice proportionally as interest rates change. The
Company's management has begun to utilize an interest rate risk simulation model
to increase its ability to monitor and forecast the effect of various interest
rate environments on earnings and its net capital position.

The objectives of the Company's liquidity management is to maintain the Bank's
ability to meet day-to-day deposit withdrawals and other payment obligations, to
raise funds to support asset growth, to maintain reserve requirements and
otherwise operate the Company on an ongoing basis. The Company strives to manage
its liquidity position to allow the Bank to meet its requirements while
maintaining an appropriate balance between assets and liabilities to meet the
return on investment expectations of the Company's shareholders. In recent
years, the Company's liquidity needs have primarily been met by growth in core
deposits. The acquisitions of CaminoReal Bancshares and Community Bancshares
during 2001 and ENB Bankshares in 2002 resulted in the receipt of an additional
$344.2 million in core deposits. In addition to core deposits, the Bank has
access to purchased funds from correspondent banks and from the Federal Home
Loan Bank, supplemented by amortizing investment and loan portfolios. Also in
2002, the Bank began accepting brokered certificates of deposit.

The Company is a separate and distinct entity from the Bank and must provide for
its own liquidity and fund its obligations. The primary source of the Company's
revenues are from dividends declared by the Bank. There are statutory and
regulatory provisions that could limit the ability of the Bank to pay dividends
to the Company. At December 31, 2002, the Bank had approximately $67.2 million
in the aggregate available to be paid as dividends to the Company. It is not
anticipated that such restrictions will have an impact on the ability of the
Company to meet its ongoing cash obligations. As of December 31, 2002, the
Company did not have any material commitments for capital expenditures.

                                       18
<PAGE>

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

The Company's future cash payments associated with its contractual obligations
pursuant to its notes payable, trust preferred securities and operating leases
are as follows (in thousands):

<TABLE>
<CAPTION>
                                   LESS THAN       1-3           3-5           OVER
                                   ONE YEAR       YEARS         YEARS         5 YEARS        TOTAL
                                   ---------     --------      --------      --------      --------
<S>                                <C>           <C>           <C>           <C>           <C>
Operating leases                   $  3,702      $  5,827      $  2,938      $  5,708      $ 18,175
Notes payable                        21,070           360             -             -        21,430
Trust preferred securities                -             -             -        80,000        80,000
                                   --------      --------      --------      --------      --------
  Total                            $ 24,772      $  6,187      $  2,938      $ 85,708      $119,605
                                   ========      ========      ========      ========      ========
</TABLE>

The Company's commitments associated with commitments to extend credit,
outstanding letters of credit and mortgages sold with recourse as of December
31, 2002 are summarized below (in thousands). Since commitments associated with
letters of credit and lending and financing arrangements may expire unused, the
amounts shown do not necessarily reflect the actual future cash funding
requirements. See Note S to the consolidated financial statements for additional
discussion of financial instruments with off-balance sheet risk.

<TABLE>
<CAPTION>
                                  LESS THAN          1-3             3-5            OVER
                                   ONE YEAR         YEARS           YEARS          5 YEARS           TOTAL
                                  ----------      ----------      ----------      ----------      ----------
<S>                               <C>             <C>             <C>             <C>             <C>
Commitments to extend credit      $  310,975      $   55,439      $   69,383      $   29,605      $  465,402
Standby letters of credit             15,876           1,912             375             133          18,296
Mortgages sold with recourse         851,061               -               -               -         851,061
                                  ----------      ----------      ----------      ----------      ----------
  Total                           $1,177,912      $   57,351      $   69,758      $   29,738      $1,334,759
                                  ==========      ==========      ==========      ==========      ==========
</TABLE>

CAPITAL RESOURCES

At December 31, 2002, shareholders' equity totaled $249.3 million or 7.0% of
total assets, as compared to $217.4 million and 7.8% of total assets at December
31, 2001.

Regulatory authorities in the United States have issued risk-based capital
standards by which all bank holding companies and banks will be evaluated in
terms of capital adequacy. These guidelines relate a banking company's capital
compared to the risk profile of its assets. Tier 1 capital includes common
shareholders' equity, minority interest in consolidated subsidiaries, and
qualifying perpetual preferred stock together with related surpluses and
retained earnings. Tier 2 capital may be comprised of limited life preferred
stock, qualifying debt instruments, and the reserves for credit losses.

On September 26, 2002, Trust III issued $31,250,000 of 8.30% Trust Preferred
Securities and invested the proceeds thereof in the 8.30% Junior Subordinated
Debentures issued by the Company. The net proceeds received by the Company from
the sale of the 8.30% Junior Subordinated Debentures were used to prepay all
$29,639,200 of the 9.28% Junior Subordinated Deferrable Interest Debentures
previously issued by the Company to Trust I. In connection with such prepayment,
the trust redeemed the 9.28% Trust Preferred Securities and the 9.28% Trust
Common Securities previously issued by Trust I.

On August 30, 2002, Statutory Trust One issued $20,000,000 of Floating Rate
Trust Preferred Securities and invested the proceeds thereof in the Floating
Rate Junior Subordinated Deferrable Interest Debentures issued by the Company.
The net proceeds received by the Company from the sale of its Floating Rate
Junior Subordinated Deferrable Interest Debentures were used, in part, to fund
the acquisition of ENB Bankshares Inc.

In March 2001, the Sterling Bancshares Capital Trust II completed the issuance
of $28,750,000 of 9.20% Trust Preferred Securities and invested the proceeds in
the 9.20% Junior Subordinated Debentures issued by the Company. The proceeds
received by the Company were used, in part, to fund the acquisition of
CaminoReal Bancshares.

                                       19
<PAGE>

Under applicable regulatory guidelines, the 8.30% Trust Preferred Securities,
the Floating Rate Trust Preferred Securities and the 9.20% Trust Preferred
Securities qualify as Tier 1 capital up to a maximum of 25% of Tier 1 capital.
Any additional portion of the Trust Preferred Securities would qualify as Tier 2
capital.

The Company may consider other sources of funds, including additional equity or
debt offerings.

Banking regulators have also issued leverage ratio requirements. The leverage
ratio requirement is measured as the ratio of Tier 1 capital to adjusted assets.
The total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage
ratios as well as the minimum capital amounts and ratios for the Company as of
December 31, 2002 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                FOR CAPITAL
                                                         ACTUAL              ADEQUACY PURPOSES
                                                  ---------------------     --------------------
                                                    AMOUNT        RATIO       AMOUNT       RATIO
                                                  ----------      -----     ----------     -----
<S>                                               <C>             <C>       <C>            <C>
Total Capital (to Risk Weighted Assets)           $  292,010      9.29%     $  251,521      8.0%
Tier 1 Capital (to Risk Weighted Assets)             264,387      8.41%        125,761      4.0%
Tier 1 Capital (to Average Assets)                   264,387      7.81%        135,358      4.0%
</TABLE>

See Note T to the Company's consolidated financial statements for further
discussion of the Company's regulatory capital requirements.

  RISK FACTORS AND CAUTIONARY STATEMENT FOR PURPOSES OF THE PROVISIONS OF THE
          "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
                               REFORM ACT OF 1995

Some of the statements and information contained in this Annual Report may
contain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements discuss future
expectations, activities or events and by their nature, they are subject to
risks and uncertainties. Forward-looking statements can be identified by the
fact that they do not relate strictly to historical or current facts. They often
include words such as "believe," "expect," "anticipate," "intend," "plan,"
"estimate," or words of similar meaning, or future or conditional verbs such as
"will," "would," "should," "could," or "may." Forward-looking statements speak
only as of the date they are made. We will not update these forward-looking
statements to reflect circumstances or events that occur after the date the
forward-looking statements are made.

Many possible factors could affect our future financial performance. Our actual
results may differ materially from what is expressed in any forward-looking
statement. Important factors that could cause actual results to differ
materially from estimates or projections contained in forward-looking statements
include:

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

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

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

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

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

                                       20
<PAGE>

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

With this in mind, you should consider the following important factors that
could cause actual results to differ materially from those expressed in any
forward-looking statement made by us or on our behalf:

OUR PROFITABILITY DEPENDS SIGNIFICANTLY ON LOCAL ECONOMIC CONDITIONS.

Our success depends primarily on the general economic conditions of the Houston
metropolitan area. Unlike larger banks that are more geographically diversified,
we provide banking and financial services to customers primarily in the Houston
metropolitan area. We also provide, to a lesser extent, banking and financial
services to customers in the San Antonio and Dallas metropolitan areas. The
local economic conditions of Houston, and to a lesser extent, San Antonio and
Dallas, have a significant impact on our commercial, real estate and
construction loans, the ability of the borrowers to repay these loans and the
value of the collateral securing these loans. A significant decline in general
economic conditions, such as inflation, recession, acts of terrorism, an
outbreak of hostilities, unemployment and other factors beyond our control will
impact these local economic conditions and will negatively affect the financial
results of our banking operations. In addition, since Houston remains largely
dependent on the energy industry, the recent downturn in the energy industry and
energy-related businesses has adversely affected the economic conditions of the
Houston metropolitan area. This downturn in the energy industry and the
energy-related business could adversely affect our results of operations and
financial condition.

WE RELY ON AN OWNER-OPERATED BUSINESS MARKET.

We target our business development and marketing strategy primarily to serve the
banking and financial needs of owner-operated businesses with credit needs of up
to $2 million. These owner-operated businesses represent a major sector of the
Houston and national economies. If general economic conditions negatively impact
this economic sector in the Houston metropolitan area or the other Texas markets
in which we operate, our results of operations and financial condition will be
significantly affected.

IF OUR ALLOWANCE FOR LOAN LOSSES IS NOT SUFFICIENT TO COVER ACTUAL LOAN LOSSES,
OUR EARNINGS COULD DECREASE.

Our loan customers may not repay their loans according to the terms of these
loans and the collateral securing the payment of these loans may be insufficient
to assure repayment. We may experience significant credit losses which could
have a material adverse effect on our operating results. We make various
assumptions and judgments about the collectibility of our loan portfolio,
including the creditworthiness of our borrowers and the value of the real estate
and other assets serving as collateral for the repayment of many of our loans.
In determining the size of the allowance, we rely on our experience and our
evaluation of economic conditions. If our assumptions prove to be incorrect, our
current allowance may not be sufficient to cover future loan losses and
adjustments may be necessary to allow for different economic conditions or
adverse developments in our loan portfolio. Material additions to our allowance
would materially decrease our net income.

In addition, federal and state regulators periodically review our allowance for
loan losses and may require us to increase our provision for loan losses or
recognize further loan charge-offs, based on judgments different than those or
our management. Any increase in our loan allowance or loan charge-offs as
required by these regulatory agencies could have a negative effect on us.

FLUCTUATIONS IN INTEREST RATES COULD REDUCE OUR PROFITABILITY.

We realize income primarily from the difference between interest earned on loans
and investments and the interest paid on deposits and borrowings. We expect that
we will periodically experience "gaps" in the interest rate sensitivities of our
assets and liabilities, meaning that either our interest-bearing liabilities
will be more sensitive to changes in market interest rates than our
interest-earning assets, or vice versa. In either event, if market interest
rates should move contrary to our position, this "gap" will work against us, and
our earnings may be negatively affected.

                                       21
<PAGE>

We are unable to predict fluctuations of market interest rates, which are
affected by the following factors:

         -        inflation;

         -        recession;

         -        a rise in unemployment;

         -        tightening money supply;

         -        international disorder and instability in domestic and foreign
                  financial markets; and

         -        instability in domestic and foreign financial markets.

Our asset liability management strategy, which is designed to control our risk
from changes in market interest rates, may not be able to prevent changes in
interest rates from having a material adverse effect on our results of operation
and financial condition.

COMPETITION WITH OTHER FINANCIAL INSTITUTIONS COULD ADVERSELY AFFECT OUR
PROFITABILITY.

We face vigorous competition from banks and other financial institutions,
including savings and loan associations, savings banks, finance companies and
credit unions. A number of these banks and other financial institutions have
substantially greater resources and lending limits, larger branch systems and a
wider array of banking services. To a limited extent, we also compete with other
providers of financial services, such as money market mutual funds, brokerage
firms, consumer finance companies and insurance companies. This competition may
reduce or limit our margins on banking services, reduce our market share and
adversely affect our results of operations and financial condition.

WE MAY NOT BE ABLE TO MAINTAIN OUR HISTORICAL GROWTH RATE WHICH MAY ADVERSELY
IMPACT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.

To achieve our growth, we have initiated internal growth programs, completed
various acquisitions and opened additional branches in the past few years. We
may not be able to sustain our historical rate of growth or may not even be able
to grow at all. We may not be able to obtain the financing necessary to fund
additional growth and may not be able to find suitable candidates for
acquisition. Various factors, such as economic conditions and competition, may
impede or prohibit the opening of new branch offices. Further, our inability to
attract and retain experienced bankers may adversely affect our internal growth.
A significant decrease in our historical rate of growth may adversely impact our
results of operation and financial condition.

WE MAY BE UNABLE TO COMPLETE ACQUISITIONS, AND ONCE COMPLETE, MAY NOT BE ABLE TO
INTEGRATE OUR ACQUISITIONS SUCCESSFULLY.

Our growth strategy is dependent on our ability to acquire other financial
institutions. We may not be able to complete any future acquisitions and, if
completed, we may not be able to successfully integrate the operations,
management, products and services of the entities we acquire. Following each
acquisition, we must expend substantial managerial, operating, financial and
other resources to integrate these entities. In particular, we may be required
to install and standardize adequate operational and control systems, deploy or
modify equipment, implement marketing efforts in new as well as existing
locations and employ and maintain qualified personnel. Our failure to
successfully integrate the entities we acquire into our existing operations may
adversely affect our financial condition and results of operations.

WE OPERATE IN A HIGHLY REGULATED ENVIRONMENT AND MAY BE ADVERSELY AFFECTED BY
CHANGES IN FEDERAL AND LOCAL LAWS AND REGULATIONS.

                                       22
<PAGE>

We are subject to extensive regulation, supervision and examination by federal
and state banking authorities. Any change in applicable regulations or federal
or state legislation could have a substantial impact on us and our subsidiary,
Sterling Bank, and its operations. Additional legislation and regulations may be
enacted or adopted in the future that could significantly affect our powers,
authority and operations, which could have a material adverse effect on our
financial condition and results of operations. Further, regulators have
significant discretion and power to prevent or remedy unsafe or unsound
practices or violations of laws by banks and bank holding companies in the
performance of their supervisory and enforcement duties. The exercise of this
regulatory discretion and power may have a negative impact on us.

ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the index included on page 28 and the consolidated financial statements
which begin on page 30 of this Form 10-K/A.

ITEM 9A -- CONTROLS AND PROCEDURES.

Based on their evaluation of the Company's disclosure controls and procedures as
of December 31, 2002, the Chief Executive Officer and Chief Financial Officer of
the Company have each concluded that as of the evaluation date, such disclosure
controls and procedures were effective to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.

There were no changes in the Company's internal control over financial reporting
during the quarter ending December 31, 2002 that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.

PART -- IV

ITEM 15 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)      List of documents filed as part of this report:

     (1) Financial Statements. The following financial statements of Sterling
         Bancshares, Inc. have been restated and are filed as part of this Form
         10-K/A:

             INDEPENDENT AUDITORS' REPORT
             CONSOLIDATED FINANCIAL STATEMENTS:
                 Balance Sheets (Restated)
                 Statements of Income (Restated)
                 Statements of Shareholders' Equity
                 Statements of Cash Flows (Restated)
                 Notes to Consolidated Financial Statements (Restated)

(a)(2)   No financial statement schedules are required to be filed as a part of
         this report.

(a)(3)   See Item 15(c) below.

(b)      During the fourth quarter of 2002, the Company filed the following
         current reports on Form 8-K: (1) October 3, 2002 (reporting under Items
         5 and 7 the Company's intention to redeem all of its 9.28% Trust
         Preferred Securities); and (2) October 17, 2002 (reporting under Items
         5 and 7 the release of the Company's third quarter 2002 financial
         results).

(c)      Exhibits

                                       23
<PAGE>

2.1      Agreement and Plan of Consolidation dated as of February 17, 1998, by
         and between the Company and Humble National Bank. [Incorporated by
         reference to the Company's Report on Form 8-K filed on February 27,
         1998 (File No. 000-20750).]

2.2      Agreement and Plan of Merger dated as of June 12, 1998 among the
         Company, Sterling Bancorporation, and Hometown Bancshares, Inc., as
         amended. [Incorporated by reference to Exhibit 2.6 of the Company's
         Annual Report on Form 10-K (File No. 000-20750).]

2.3      Agreement and Plan of Merger dated as of February 24, 1999 among the
         Company, Sterling Bancorporation, and B. O. A. Bancshares, Inc., as
         amended. [Incorporated by reference to the Company's Report on Form 8-K
         filed on June 2, 1999 (File No. 000-20750).]

2.4      Agreement and Plan of Merger dated as of October 23, 2000 among the
         Company, Sterling Bancorporation, Inc. and CaminoReal Bancshares of
         Texas, Inc., as amended. [Incorporated by reference to Exhibit 2.5 of
         the Company's Annual Report on Form 10-K (File No. 000-20750).]

2.5      Agreement and Plan of Merger dated as of March 1, 2001, by and between
         Sterling Bancshares, Inc. and Lone Star Bancorporation, Inc., as
         amended. [Incorporated by reference to Exhibit 2 of the Company's
         Quarterly Report on Form 10-Q filed on May 14, 2001 (File No.
         000-20750).]

2.6      Agreement and Plan of Merger dated as of October 1, 2001 by and among
         Sterling Bancshares, Inc., Sterling Bancorporation, Inc. and Community
         Bancshares, Inc., as amended. [Incorporated by reference to Exhibit 2.7
         of the Company's Annual Report on Form 10-K (File No. 000-20750).]

2.7      Agreement and Plan of Merger Among Sterling Bancshares, Inc., Sterling
         Bancorporation, Inc. and ENB Bankshares Inc. dated as of May 22, 2002.
         [Incorporated by reference to Exhibit 2.1 of the Company's Quarterly
         Report on Form 10-Q filed on August 14, 2002 (File No. 000-20750).]

2.8      Purchase and Assumption Agreement dated July 12, 2002 between Sterling
         Bank Inc. and James Wilson as amended by First Amendment to Purchase
         and Assumption Agreement dated as of August 2, 2002. [Incorporated by
         reference to Exhibit 2.2 of the Company's Quarterly Report on Form 10-Q
         filed on August 13, 2002 (File No. 000-20750).]

2.9**    Purchase and Assumption Agreement dated as of October 29, 2002 between
         Sterling Bank Inc. and South Texas National Bank of Laredo.

3.1      Restated and Amended Articles of Incorporation of the Company, as
         amended. [Incorporated by reference to Exhibit 3.1 to the Registration
         Statement on Form S-3 (File Nos. 333-55724, 333-55724-01, and
         333-55724-02).]

3.2      Articles of Amendment to the Restated and Amended Articles of
         Incorporation of Sterling Bancshares, Inc. [Incorporated by reference
         to Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q filed on
         August 13, 2002 (File No. 000-20750).]

3.3      Amended and Restated Bylaws of Sterling Bancshares, Inc. [Incorporated
         by reference to Exhibit 3.3 of the Company's Quarterly Report on Form
         10-Q filed on August 13, 2002 (File No. 000-20750).]

4.1      Preferred Securities Guarantee Agreement dated March 21, 2001.
         [Incorporated by reference to Exhibit 4.2 of the Company's Report on
         Form 8-K filed on March 21, 2001 (File No. 000-20750).]

4.2      Indenture dated March 21, 2001. [Incorporated by reference to Exhibit
         4.4 of the Company's Report on Form 8-K filed on March 21, 2001 (File
         No. 000-20750).]

4.3      First Supplemental Indenture dated March 21, 2001. [Incorporated by
         reference to Exhibit 4.5 of the Company's Report on Form 8-K filed on
         March 21, 2001 (File No. 000-20750).]

                                       24
<PAGE>

4.4      9.20% Subordinated Deferrable Interest Debenture due March 21, 2031.
         [Incorporated by reference to Exhibit 4.7 of the Company's Report on
         Form 8-K filed on March 21, 2001 (File No. 000-20750).]

4.5      Indenture dated August 30, 2002. [Incorporated by reference to Exhibit
         4.4 of the Company's Report on Form 8-K filed on September 12 ,2002
         (File No. 000-20750).]

4.6      Junior Subordinated Deferrable Interest Debenture due August 30, 2032.
         [Incorporated by reference to Exhibit 4.6 of the Company's Report on
         Form 8-K filed on September 12, 2002 (File No. 000-20750).]

4.7      Guarantee Agreement dated August 30, 2002. [Incorporated by reference
         to Exhibit 4.6 of the Company's Report on Form 8-K filed on September
         12, 2002 (File No. 000-20750).]

4.8      Preferred Securities Guarantee Agreement dated September 26, 2002.
         [Incorporated by reference to Exhibit 4.2 of the Company's Report on
         Form 8-K dated September 26, 2002 (File No. 000-20750).]

4.9      Second Supplemental Indenture dated September 26, 2002. [Incorporated
         by reference to Exhibit 4.9 of the Company's Report on Form 8-K dated
         September 26, 2002 (File No. 000-20750).]

4.10     8.30% Junior Subordinated Deferrable Interest Debenture due September
         26, 2032. [Incorporated by reference to Exhibit 4.8 of the Company's
         Report on Form 8-K dated September 26, 2002 (File No. 000-20750).]

10.1***  1994 Incentive Stock Option Plan of the Company. [Incorporated by
         reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K
         for the year ended December 31, 1994.]

10.2     1994 Employee Stock Purchase Plan of the Company. [Incorporated by
         reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K
         for the year ended December 31, 1994.]

10.3***  1984 Incentive Stock Option Plan of the Company. [Incorporated by
         reference to Exhibit 10.1 of the Company's Registration Statement on
         Form S-1, effective October 22, 1992 (Registration No. 33-51476).]

10.4***  1995 Non-Employee Director Stock Compensation Plan. [Incorporated by
         reference to Exhibit 4.3 of the Company's Registration Statement on
         Form S-8 (File No. 333-16719).]

10.5     Credit Agreement dated February 2, 2002 made by and between the Company
         and Wells Fargo Bank Minnesota, National Association regarding a line
         of credit in the amount of $20,000,000. [Incorporated by reference to
         the Company's Annual Report on Form 10-K for the year ended December
         31, 2001 (File No. 000-207501).]

10.6**   First Amendment to Credit Agreement dated February 2, 2003 made by and
         between the Company and Wells Fargo Bank, National Association
         regarding a line of credit in the amount of $20,000,000.

10.7***  Employment Agreement between Sterling Bancshares, Inc. and George
         Martinez executed on October 31, 2001 and effective as of January 1,
         2002. [Incorporated by reference to Exhibit 99.2 of the Company's
         Report on Form 8-K filed on October 14, 2001 (File No. 000-207500).]

10.8***  Employment Agreement between Sterling Bancshares, Inc. and J. Downey
         Bridgwater executed on October 31, 2001 and effective as of January 1,
         2002. [Incorporated by reference to Exhibit 99.3 of the Company's
         Report on Form 8-K filed on October 14, 2001 (File No. 000-207500).]

10.9***  Incentive Compensation Agreement between Sterling Bancshares, Inc. and
         Eugene S. Putnam effective as of January 1, 2002. [Incorporated by
         reference to Exhibit 10 of the Company's Quarterly Report on Form 10-Q
         filed on May 13, 2002 (File No. 000-207500).]

                                       25
<PAGE>

21**     Subsidiaries of the Company.

23.1*    Consent of Deloitte & Touche LLP, Independent Auditors

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

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

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

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

* As filed herewith.

** As previously filed.

*** Management Compensation Agreement

                                       26
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                           STERLING BANCSHARES, INC.

                                           by  /s/ J. Downey Bridgwater
                                              ----------------------------------
DATE: November 13, 2003                    J. Downey Bridgwater,
                                           Chief Executive Officer and President


                                       27
<PAGE>

STERLING BANCSHARES, INC.

TABLE OF CONTENTS

The following consolidated financial statements of Sterling Bancshares, Inc.
have been restated as described in Note Z included in these consolidated
financial statements.

<TABLE>
<CAPTION>
                                                          PAGE
<S>                                                       <C>
INDEPENDENT AUDITORS' REPORT                               29

CONSOLIDATED FINANCIAL STATEMENTS:

   Balance Sheets (Restated)                               30

   Statements of Income (Restated)                         31

   Statements of Shareholders' Equity                      32

   Statements of Cash Flows (Restated)                     34

   Notes to Consolidated Financial Statements (Restated)   35
</TABLE>

                                       28
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
    Sterling Bancshares, Inc.
Houston, Texas

We have audited the accompanying consolidated balance sheets of Sterling
Bancshares, Inc. and subsidiaries (the "Company") as of December 31, 2002 and
2001, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2002. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Sterling Bancshares,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.

As discussed in Note A to the consolidated financial statements, in 2002 the
Company adopted the provisions of Statement of Accounting Standards No. 142
"Goodwill and Other Intangible Assets."

As discussed in Note Z, the accompanying consolidated financial statements have
been restated.

DELOITTE & TOUCHE LLP
Houston, Texas
March 10, 2003 (November 4, 2003 as to Note Z)

                                       29
<PAGE>

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                     2002            2001
                                                                                                 ------------    ------------
                                                                                                 (AS RESTATED)   (AS RESTATED)
                                                                                                  (See Note Z)    (See Note Z)
<S>                                                                                              <C>             <C>
ASSETS
Cash and cash equivalents  (Note C)                                                              $    147,000    $    148,295
Interest-bearing deposits in financial institutions                                                     1,302           2,114
Securities purchased with an agreement to resell                                                            -          12,313
Trading assets                                                                                        142,803         118,511
Available-for-sale securities, at fair value (Note D)                                                 251,165         251,008
Held-to-maturity securities, at amortized cost (Note D)                                                61,889          78,408
Loans held for sale (Note E)                                                                          701,301         261,505
Loans held for investment (Notes E and F)                                                           1,943,561       1,666,788
Allowance for credit losses (Note G)                                                                  (27,621)        (22,927)
                                                                                                 ------------    ------------
    Loans, net                                                                                      1,915,940       1,643,861

Accrued interest receivable                                                                            15,800          11,593
Real estate acquired by foreclosure                                                                     3,358           1,837
Premises and equipment, net (Note H)                                                                   56,704          54,175
Goodwill, net (Note I)                                                                                 61,284          54,812
Mortgage servicing rights (Note I)                                                                     26,467          19,592
Other assets                                                                                          197,732         120,066
                                                                                                 ------------    ------------
TOTAL ASSETS                                                                                     $  3,582,745    $  2,778,090
                                                                                                 ============    ============

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
    Demand deposits:
      Noninterest-bearing                                                                        $  1,016,818    $    797,850
      Interest-bearing                                                                                919,477         879,542
    Certificates of deposit and other time deposits (Note J)                                          736,777         591,588
                                                                                                 ------------    ------------
      Total deposits                                                                                2,673,072       2,268,980
    Other borrowed funds (Note K)                                                                     509,590         180,298
    Notes payable (Note L)                                                                             21,430          20,879
    Accrued interest payable and other liabilities                                                     44,252          28,832
                                                                                                 ------------    ------------
      Total liabilities                                                                             3,248,344       2,498,989

COMMITMENTS AND CONTINGENCIES (Notes R and S)

COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED
    SECURITIES (Note M)                                                                                80,000          57,500

MINORITY INTEREST IN STERLING CAPITAL MORTGAGE COMPANY                                                  5,074           4,232

SHAREHOLDERS' EQUITY (Notes O, P and T):
    Convertible Preferred stock, $1 par value; 1,000,000 shares authorized, 59,000 and 39,000
      issued and outstanding at December 31, 2002 and 2001, respectively                                   59              39
    Common stock, $1 par value; 100,000,000 shares authorized, 43,982,677
      and 43,769,664 issued and outstanding at December 31, 2002 and 2001, respectively                43,983          43,770
    Capital surplus                                                                                    44,633          42,526
    Retained earnings                                                                                 156,664         127,144
    Accumulated other comprehensive income--net unrealized gain on available-for-sale
      securities, net of tax                                                                            3,988           3,890
                                                                                                 ------------    ------------
      Total shareholders' equity                                                                      249,327         217,369
                                                                                                 ------------    ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                       $  3,582,745    $  2,778,090
                                                                                                 ============    ============
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       30
<PAGE>

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                         2002            2001       2000
                                                                     -------------     --------   --------
                                                                     (AS RESTATED)   (AS RESTATED)
                                                                      (See Note Z)    (See Note Z)
<S>                                                                  <C>               <C>        <C>
Interest income:
     Loans, including fees                                             $156,902        $146,184   $131,261
     Securities:
       Taxable                                                           13,957          16,667     27,214
       Non-taxable                                                        2,890           3,304      3,503
     Trading assets                                                       4,540           2,787          -
     Federal funds sold and securities purchased under agreements
       to resell                                                            463           3,578      4,471
     Deposits in financial institutions                                     106              79         74
                                                                       --------        --------   --------
       Total interest income                                            178,858         172,599    166,523
                                                                       --------        --------   --------
Interest expense:
     Demand and savings deposits                                          8,541          16,915     19,879
     Certificates and other time deposits                                17,479          26,141     24,256
     Other borrowed funds                                                 4,946           6,861     18,653
     Notes payable                                                          797             135         36
                                                                       --------        --------   --------
       Total interest expense                                            31,763          50,052     62,824
                                                                       --------        --------   --------
Net interest income                                                     147,095         122,547    103,699
Provision for credit losses (Note G)                                     14,018          11,684      9,668
                                                                       --------        --------   --------
Net interest income after provision for credit losses                   133,077         110,863     94,031
                                                                       --------        --------   --------
Noninterest income:
     Customer service fees                                               16,893          14,834     10,832
     Gain on sale of mortgage loans                                      32,385          24,206     11,959
     Other                                                               47,346          27,585     18,851
                                                                       --------        --------   --------
       Total noninterest income                                          96,624          66,625     41,642
                                                                       --------        --------   --------
Noninterest expense:
     Salaries and employee benefits (Note O)                             90,244          69,031     53,463
     Occupancy expense                                                   23,844          18,284     13,762
     Technology                                                           5,722           5,341      3,973
     Minority interest expense:
       Company-obligated mandatorily redeemable trust preferred
          securities of subsidiary trust (Note N)                         5,916           4,716      2,668
       Sterling Capital Mortgage Company                                    842           2,273        752
     Conversion costs related to acquisitions                               822           3,181          -
     Other                                                               47,682          27,851     20,874
                                                                       --------        --------   --------
       Total noninterest expense                                        175,072         130,677     95,492
                                                                       --------        --------   --------
     Income before income taxes                                          54,629          46,811     40,181
     Provision for income taxes (Note N)                                 18,078          16,410     12,641
                                                                       --------        --------   --------
      Net Income                                                       $ 36,551        $ 30,401   $ 27,540
                                                                       ========        ========   ========
Earnings per share (Note Q):
     Basic                                                             $   0.83        $   0.72   $   0.66
                                                                       ========        ========   ========
     Diluted                                                           $   0.82        $   0.71   $   0.65
                                                                       ========        ========   ========
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       31
<PAGE>

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                        CONVERTIBLE
                                                      PREFERRED STOCK        COMMON STOCK
                                                     -----------------     ----------------
                                                     SHARES    AMOUNT      SHARES   AMOUNT
                                                     ------    -------     ------   -------
<S>                                                  <C>       <C>         <C>      <C>
BALANCE AT JANUARY 1, 2000                              353    $   353     41,025   $41,025
    Net income
    Net change in unrealized gain (loss) on
     available-for-sale securities, net of tax
         Total comprehensive income
    Issuance of common stock (Note P)                                         235       235
    Sale of preferred stock                              39         39
    Conversion of preferred stock to common stock      (341)      (341)       536       536
    Cash dividends paid
    Purchase of treasury stock                                                (68)      (68)
    Transfer to capital surplus
                                                        ---    -------     ------   -------
BALANCE AT DECEMBER 31, 2000                             51         51     41,728    41,728
    Net income
    Net change in unrealized gain (loss) on
     available-for-sale securities, net of tax
         Total comprehensive income
    Issuance of common stock (Note P)                                         581       581
    Issuance of common stock for Community Bank                             1,444     1,444
    Conversion of preferred stock to common stock       (12)       (12)        17        17
    Cash dividends paid
                                                        ---    -------     ------   -------
BALANCE AT DECEMBER 31, 2001                             39         39     43,770    43,770
    Net income
    Net change in unrealized gain on
     available-for-sale securities, net of tax
         Total comprehensive income
    Issuance of common stock (Note P)                                         213       213
    Issuance of preferred stock                          20         20
    Cash dividends paid
                                                        ---    -------     ------   -------
BALANCE AT DECEMBER 31, 2002                             59    $    59     43,983   $43,983
                                                        ===    =======     ======   =======
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       32
<PAGE>

<TABLE>
<CAPTION>
                        ACCUMULATED OTHER
                      COMPREHENSIVE INCOME-
                      NET UNREALIZED GAIN
                      (LOSS) ON AVAILABLE-
                              FOR-
CAPITAL   RETAINED       SALE SECURITIES,      TOTAL SHAREHOLDERS'
SURPLUS   EARNINGS          NET OF TAX               EQUITY
-------   --------    --------------------     -------------------
<S>       <C>         <C>                      <C>
$19,699   $ 81,355         $ (1,362)              $    141,070
            27,540                                      27,540

                              2,399                      2,399
                                                  ------------
                                                        29,939
                                                  ------------
  1,051                                                  1,286
    346                                                    385
   (195)                                                     -
            (5,243)                                     (5,243)
   (544)                                                  (612)
  1,000     (1,000)                                          -
-------   --------         --------               ------------
 21,357    102,652            1,037                    166,825

            30,401                                      30,401

                              2,853                      2,853
                                                  ------------
                                                        33,254
                                                  ------------
  3,170                                                  3,751
 18,004                                                 19,448
     (5)                                                     -
            (5,909)                                     (5,909)
-------    -------         --------               ------------
 42,526    127,144            3,890                    217,369

            36,551                                      36,551

                                 98                         98
                                                  ------------
                                                        36,649
                                                  ------------
  1,885                                                  2,098
    222                                                    242
            (7,031)                                     (7,031)
-------   --------         --------               ------------
$44,633   $156,664         $  3,988               $    249,327
=======   ========         ========               ============
</TABLE>

                                       33
<PAGE>
STERLING BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                             2002           2001         2000
                                                                                         -------------    ---------    ---------
                                                                                         (AS RESTATED)   (AS RESTATED)
                                                                                          (See Note Z)    (See Note Z)
<S>                                                                                      <C>              <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income                                                                           $  36,551      $  30,401    $  27,540
      Adjustments to reconcile net income to net cash provided by (used in)
          operating activities:
          Amortization and accretion of premiums and discounts on securities, net              2,529            479          333
          Provision for credit losses                                                         14,018         11,684        9,668
          Deferred income tax expense                                                           (560)         9,128         (370)
          Gain on sale of assets                                                             (33,615)       (24,540)     (12,020)
          Depreciation and amortization                                                       10,529          9,806        7,713
          Write-down of real estate acquired by foreclosure                                      594             94          254
          Net loans originated or purchased for sale or resale                              (407,411)       (98,151)     (56,785)
          Purchases of trading assets                                                       (529,176)      (336,019)           -
          Proceeds from sale of trading assets                                               498,366        216,705            -
          Capitalized mortgage servicing rights                                              (20,025)       (19,839)        (678)
          Amortization of mortgage servicing rights                                           13,150          1,154          252
          Increase in accrued interest receivable and other assets                           (79,606)       (36,836)      (6,148)
          Increase in accrued interest payable and other liabilities                          16,029          8,686        1,682
                                                                                           ---------      ---------    ---------
            Net cash used in operating activities                                           (478,627)      (227,248)     (28,559)

CASH FLOWS FROM INVESTING ACTIVITIES:
      Decrease in securities purchased under agreements to resell                             12,313         25,550        2,971
      Proceeds from maturities and principal paydowns of held-to-maturity securities          16,306         12,275       18,831
      Proceeds from sale of available-for-sale securities                                      6,477         87,144      158,374
      Proceeds from maturities and principal paydowns of available-for-sale securities       131,761         88,125       77,287
      Purchases of available-for-sale securities                                            (140,361)      (105,249)     (14,195)
      Proceeds from maturities and principal paydowns of trading securities                    7,537          1,101            -
      Net increase in loans                                                                 (225,722)       (99,121)    (162,970)
      Purchase of Bank Owned Life Insurance                                                   (2,084)        (2,049)      (5,988)
      Proceeds from sale of real estate acquired by foreclosure                                2,969          1,881          605
      Net decrease in interest-bearing deposits in financial institutions                        812            396        1,189
      Purchase of CaminoReal Bancshares, Inc.                                                      -        (51,813)           -
      Cash and cash equivalents acquired with CaminoReal Bancshares, Inc.                          -         33,390            -
      Purchase of Community Bancshares, Inc.                                                       -        (14,552)           -
      Cash and cash equivalents acquired with Community Bancshares, Inc.                           -         18,531            -
      Purchase of ENB Bankshares, Inc.                                                       (10,386)             -            -
      Cash and cash equivalents acquired with ENB Bankshares, Inc.                             2,438              -            -
      Proceeds from sale of premises and equipment                                             4,768          8,370          391
      Purchase of premises and equipment                                                     (15,065)       (17,525)     (11,682)
                                                                                           ---------      ---------    ---------
            Net cash (used in) provided by investing activities                             (208,237)       (13,546)      64,813

CASH FLOWS FROM FINANCING ACTIVITIES:
      Net increase in deposit accounts                                                       346,070        186,265      210,021
      Net increase (decrease) in repurchase agreements and federal funds purchased           322,292         35,720     (221,968)
      Proceeds from notes payable                                                                  -         20,000        1,600
      Repayments of notes payable                                                               (602)        (1,600)           -
      Issuance of company-obligated mandatorily redeemable trust preferred securities         51,250         28,750            -
      Redemption of trust preferred securities                                               (28,750)             -            -
      Proceeds from issuance of common and preferred stock                                     2,340          3,751        1,671
      Purchase of treasury stock                                                                   -              -         (612)
      Payments of cash dividends                                                              (7,031)        (5,909)      (5,243)
                                                                                           ---------      ---------    ---------
            Net cash provided by (used in) financing activities                              685,569        266,977      (14,531)
                                                                                           ---------      ---------    ---------
Net increase (decrease) in cash and cash equivalents                                          (1,295)        26,183       21,723
Cash and cash equivalents at beginning of year                                               148,295        122,112      100,389
                                                                                           ---------      ---------    ---------
Cash and cash equivalents at end of year                                                   $ 147,000      $ 148,295    $ 122,112
                                                                                           =========      =========    =========
Supplemental information:
      Income taxes paid                                                                    $  14,173      $  18,700    $  18,959
                                                                                           =========      =========    =========
      Interest paid                                                                        $  32,417      $  50,896    $  62,956
                                                                                           =========      =========    =========
      Noncash investing and financing activities:
          Acquisition of real estate through foreclosure of collateral                     $   3,981      $   1,932    $   1,192
                                                                                           =========      =========    =========
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       34
<PAGE>

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

A.       ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
         POLICIES

         ORGANIZATION - Sterling Bancshares, Inc. (hereinafter, collectively
         with its subsidiaries, the "Company" or "Bancshares"), headquartered in
         Houston, Texas, is a bank holding company that provides commercial and
         retail banking services in the greater metro areas of Dallas, Houston,
         San Antonio, and South Texas through the community banking offices of
         Sterling Bank, a banking association chartered under the laws of the
         State of Texas (the "Bank"). Also, the Company provides mortgage
         banking services through its 80 percent ownership of Sterling Capital
         Mortgage Company ("SCMC").

         SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES - The
         accounting and reporting policies of the Company conform to accounting
         principles generally accepted in the United States of America and the
         prevailing practices within the banking industry. A summary of
         significant accounting policies follows:

         BASIS OF PRESENTATION - The consolidated financial statements include
         the accounts of Bancshares and its subsidiaries. Intercompany
         transactions have been eliminated in consolidation. The consolidated
         financial statements have been restated to present the combined
         financial information of acquisitions accounted for using the pooling
         of interests method (see Note B).

         USE OF ESTIMATES - The preparation of financial statements in
         conformity with accounting principles generally accepted in the United
         States of America requires management to make estimates and assumptions
         that affect the reported amounts in the financial statements. Actual
         results could differ from those estimates. Material estimates that are
         particularly susceptible to significant change in the near term relate
         to the determination of the allowance for credit losses, and the
         valuation of foreclosed real estate, deferred tax assets, goodwill,
         servicing rights and trading activities.

         TRADING ASSETS - Securities classified as trading assets are bought
         with the anticipation of sale in the near term and are carried at fair
         market value. These assets are held up to 120 days. These securities
         consist primarily of the government-guaranteed portion of SBA loans.

         SECURITIES - Securities classified as held-to-maturity are carried at
         cost, adjusted for the amortization of premiums and the accretion of
         discounts. Management has the positive intent and the Company has the
         ability to hold these assets until their maturities. Under certain
         circumstances (including the deterioration of the issuer's
         creditworthiness or a change in tax law or statutory or regulatory
         requirements), these securities may be sold or transferred to another
         portfolio.

         Securities classified as available-for-sale are carried at fair value.
         Unrealized gains and losses are excluded from earnings and reported,
         net of tax, as accumulated comprehensive income until realized.
         Securities within the available-for-sale portfolio may be used as part
         of the Company's asset and liability management strategy and may be
         sold in response to changes in interest rate risk, prepayment risk or
         other factors.

                                       35
<PAGE>

         Premiums and discounts are amortized and accreted to operations using
         the level-yield method of accounting, adjusted for prepayments as
         applicable. The specific identification method of accounting is used to
         compute gains or losses on the sales of these assets.

         LOANS HELD FOR SALE - Loans originated and intended for sale in the
         secondary market are carried at the lower of cost or market value in
         the aggregate. Premiums, discounts and loan fees (net of certain direct
         loan origination costs) on loans held for sale are deferred until the
         related loans are sold or repaid. Gains or losses on loan sales are
         recognized at the time of sale and determined using the specific
         identification method.

         LOANS HELD FOR INVESTMENT - Loans held for investment are stated at the
         principal amount outstanding, net of unearned discount. Unearned
         discount relates principally to consumer installment loans. The related
         interest income for installment loans is recognized principally by the
         simple interest method, which records interest in proportion to the
         declining outstanding balances of the loans. This method approximates
         the interest method. For other loans, such income is recognized using
         the simple interest method.

         Impaired loans, with the exception of groups of smaller-balance
         homogeneous loans that are collectively evaluated for impairment, are
         defined as loans for which, based on current information and events, it
         is probable that a creditor will be unable to collect all amounts due,
         both interest and principal, according to the contractual terms of the
         loan agreement. The allowance for credit losses related to impaired
         loans is determined based on the present value of expected cash flows
         discounted at the loan's effective interest rate or, as a practical
         expedient, the loan's observable market price or the fair value of the
         collateral if the loan is collateral dependent.

         NONACCRUAL, PAST-DUE AND RESTRUCTURED LOANS - Included in this loan
         category are loans which have been categorized by management as
         nonaccrual because collection of interest is doubtful and loans which
         have been restructured to provide a reduction in the interest rate
         below the current market rate or a deferral of interest or principal
         payments.

         When the payment of principal or interest on a loan is delinquent for
         90 days, or earlier in some cases, the loan is placed on nonaccrual
         status and classified as impaired unless the loan is in the process of
         collection and the underlying collateral fully supports the carrying
         value of the loan. If the decision is made to continue accruing
         interest on the loan, periodic reviews are made to evaluate the
         appropriateness of the accruing status of the loan. When a loan is
         placed on nonaccrual status, interest accrued and uncollected during
         the current year prior to the judgment of noncollectibility is charged
         to operations. Interest accrued and uncollected during prior periods is
         charged to the allowance for credit losses. Generally, any payments
         received on nonaccrual loans are applied first to outstanding loan
         amounts and next to the recovery of charged-off loan amounts. Any
         excess is treated as a recovery of lost interest.

         Restructured loans are those loans for which concessions in terms have
         been granted because of a borrower's financial difficulty. Interest is
         generally accrued on such loans in accordance with the new terms.

         ALLOWANCE FOR CREDIT LOSSES - The allowance for credit losses is a
         valuation allowance for probable losses incurred on loans. All losses
         are charged to the allowance when the loss actually occurs or when a
         determination is made that a probable loss has occurred. Recoveries are
         credited to the allowance at the time of recovery.

         Throughout the year, management estimates the probable level of losses
         to determine whether the allowance for credit losses is adequate to
         absorb losses in the existing portfolio. Based on these

                                       36
<PAGE>

         estimates, an amount is charged to the provision for credit losses and
         credited to the allowance for credit losses in order to adjust the
         allowance to a level determined to be adequate to absorb losses.

         Management's judgment as to the level of probable losses on existing
         loans involves the consideration of current economic conditions and
         their estimated effects on specific borrowers; an evaluation of the
         existing relationships among loans, potential credit losses and the
         present level of the allowance; results of examinations of the loan
         portfolio by regulatory agencies; and management's internal review of
         the loan portfolio. In determining the collectibility of certain loans,
         management also considers the fair value of any underlying collateral.
         The amount ultimately realized may differ from the carrying value of
         these assets because of economic, operating or other conditions beyond
         the Company's control.

         It should be understood that estimates of credit losses involve an
         exercise of judgment. While it is reasonably possible that in the near
         term the Company may sustain losses which are substantial relative to
         the allowance for credit losses, it is the judgment of management that
         the allowance for credit losses reflected in the consolidated balance
         sheets is adequate to absorb estimated losses that exist in the current
         loan portfolio.

         PREMISES AND EQUIPMENT - Land is carried at cost. Premises and
         equipment are carried at cost, less accumulated depreciation and
         amortization. Depreciation expense is computed primarily using the
         straight-line method over the estimated useful lives of the assets.
         Leasehold improvements are amortized using the straight-line method
         over the periods of the leases or the estimated useful lives, whichever
         is shorter.

         GOODWILL - Through December 31, 2001, goodwill was amortized using the
         straight-line method over a period of 10 to 25 years. Due to the
         adoption of SFAS 142 on January 1, 2002, amortization of goodwill has
         been terminated. See subsequent discussion in "Recent Accounting
         Standards".

         MORTGAGE SERVICING RIGHTS - SCMC determines the fair value of
         capitalized mortgage servicing rights ("MSRs") using assumptions
         regarding economic factors as they relate to the servicing portfolio.
         These assumptions are obtained from an independent servicing consultant
         and agreed to by management. SCMC evaluates impairment of the servicing
         rights by stratifying the portfolio based on predominant risk
         characteristics of the underlying loans including loan type and
         interest rate.

         REAL ESTATE ACQUIRED BY FORECLOSURE - The Bank records real estate
         acquired by foreclosure at fair value less estimated costs to sell.
         Adjustments are made to reflect declines in value subsequent to
         acquisition, if any, below the recorded amounts. Required developmental
         costs associated with foreclosed property under construction are
         capitalized and considered in determining the fair value of the
         property. Operating expenses of such properties, net of related income,
         and gains and losses on their disposition are included in noninterest
         expense.

         INCOME TAXES - Bancshares files a consolidated federal income tax
         return with its subsidiaries. Each computes income taxes as if it filed
         a separate return and remits to, or is reimbursed by Bancshares based
         on the portion of taxes currently due or refundable.

         Deferred income taxes are accounted for by applying statutory tax rates
         in effect at the balance sheet date to differences between the book
         basis and the tax basis of assets and liabilities. The resulting
         deferred tax assets and liabilities are adjusted to reflect changes in
         enacted tax laws or rates.

         Realization of net deferred tax assets is dependent on generating
         sufficient future taxable income. Although realization is not assured,
         management believes it is more likely than not that all of the net

                                       37
<PAGE>

         deferred tax assets will be realized. The amount of the net deferred
         tax asset considered realizable, however, could be reduced in the near
         term if estimates of future taxable income are reduced.

         STOCK-BASED COMPENSATION - The Company accounts for stock-based
         employee compensation plans using the intrinsic value-based method of
         accounting as permitted and discloses pro forma information assuming
         the fair value-based method as prescribed by SFAS No. 123.

         PROFIT SHARING PLAN - The Company has a profit sharing plan that covers
         substantially all employees. Contributions are accrued and funded
         currently.

         STATEMENTS OF CASH FLOWS - For purposes of the statements of cash
         flows, cash and cash equivalents are defined as cash, due from banks
         and federal funds sold. Generally, federal funds are sold for one-day
         periods.

         EARNINGS PER SHARE - Basic earnings per share is computed using the
         weighted average number of shares outstanding. Diluted earnings per
         share is computed using the weighted average number of shares
         outstanding adjusted for the incremental shares issuable upon
         conversion of preferred stock and issuable upon exercise of outstanding
         stock options. All outstanding and weighted average share amounts
         presented in this report have been restated to reflect the effect of
         stock splits where applicable.

         COMPREHENSIVE INCOME - Comprehensive income includes all changes in
         equity during the period presented that result from transactions and
         other economic events other than transactions with shareholders. The
         Company reports comprehensive income in the consolidated statements of
         shareholders' equity.

         SEGMENT INFORMATION - The Company considers its business as two
         operating segments: commercial banking and mortgage banking. The
         Company has disclosed separately results of operations relating to the
         two segments in Note U to the consolidated financial statements.

         RECLASSIFICATIONS - Certain reclassifications have been made to prior
         year amounts to conform to current year presentation, as restated. All
         reclassifications have been applied consistently for the periods
         presented.

         RECENT ACCOUNTING STANDARDS - In December 2002, the FASB issued
         Statement No. 148, "Accounting for Stock-Based Compensation -
         Transition and Disclosure", ("SFAS 148"). SFAS 148 provides guidance on
         the accounting for stock based compensation. In addition, this
         Statement amends the disclosure requirements of Statement 123 to
         require prominent disclosures in both annual and interim financial
         statements about the method of accounting for stock-based employee
         compensation and the effect of the method used on reported results. The
         Company adopted SFAS 148 as of December 31, 2002 and has elected to
         continue to account for its employee stock options using the intrinsic
         value-based method.

         In October 2002, the FASB issued Statement No. 147, "Acquisitions of
         Certain Financial Institutions" ("SFAS 147"). SFAS 147 provides
         guidance on the accounting for the acquisition of a financial
         institution, except transactions between two or more mutual
         enterprises. The implementation of this standard did not have a
         material impact on the financial position or results of operation.

         In June 2002, the FASB issued Statement of Financial Accounting
         Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with
         Exit or Disposal Activities." SFAS 146 addresses accounting and
         reporting costs associated with exit or disposal activities and
         nullifies Emerging

                                       38
<PAGE>

         Issues Task Force (EITF) Issue 94-3, "Liability Recognition for Certain
         Employee Termination Benefits and Other Costs to Exit an Activity".
         This statement requires that a liability for a cost associated with an
         exit or disposal activity shall be recognized and measured initially at
         its fair value in the period in which the liability is incurred. This
         statement is effective for exit or disposal activities that are
         initiated after December 31, 2002. The Company does not believe that
         the adoption of SFAS 146 will have a significant impact on its
         financial statements.

         In April 2002, the FASB issued Statement of Financial Accounting
         Standards No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4,
         44, and 64, Amendment of FASB Statement No. 13, and Technical
         Corrections ". The provisions of this Statement related to the
         rescission of Statement 4 shall be applied in fiscal years beginning
         after May 15, 2002. The provisions in paragraphs 8 and 9(c) of this
         Statement related to Statement 13 shall be effective for transactions
         occurring after May 15, 2002. All other provisions of this Statement
         shall be effective for financial statements issued on or after May 15,
         2002. SFAS 145 amends other existing authoritative pronouncements to
         make various technical corrections, clarify meanings, or describe their
         applicability under changed conditions. The Company does not believe
         that the adoption of SFAS 145 will have a significant impact on its
         financial statements.

         In August 2001, the FASB issued Statement No. 143, Accounting for Asset
         Retirement Obligations ("SFAS 143"), and Statement No. 144, Accounting
         for Impairment or Disposal of Long Lived Assets ("SFAS 144"). SFAS 143
         requires the recording of the fair value of a liability for an asset
         retirement obligation in the period in which it is incurred, and is
         effective January 1, 2003. SFAS 144 was effective January 1, 2002, and
         supersedes existing accounting literature dealing with impairment and
         disposal of long lived assets, including discontinued operations. It
         addresses financial accounting and reporting for the impairment of long
         lived assets and for long lived assets to be disposed of, and expands
         current reporting for discontinued operations to include disposals of a
         "component" of an entity that has been disposed of or is classified as
         held for sale. The Company's management does not believe that the
         implementation of SFAS 143 will have a material impact on the Company's
         consolidated financial statements. SFAS 144 was implemented during 2002
         and did not have a material impact on the Company's consolidated
         financial statements.

         In June 2001, the Financial Accounting Standards Board ("FASB") issued
         Statement No. 141, "Business Combinations" ("SFAS 141") and Statement
         No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). These
         statements establish new standards for accounting and reporting for
         business combinations and for goodwill and intangible assets resulting
         from business combinations. SFAS 141 applies to all business
         combinations initiated after June 30, 2001, and requires the
         application of the purchase method of accounting to all business
         combinations. The Company implemented SFAS 141 on July 1, 2001. SFAS
         142 terminates the amortization of the goodwill presently on the
         Company's books. Such amortization, after-tax, was $1.2 million for
         year ended December 31, 2001. Under SFAS 142, the Company is required
         to periodically assess its goodwill and other intangible assets for
         potential impairment, based on the fair value of the reporting unit at
         which the goodwill is recorded. The Company implemented SFAS 142 on
         January 1, 2002. Goodwill currently carried on the balance sheet was
         subject to an initial assessment for impairment. The Company has
         completed its initial assessment and determined that there was no
         impairment of goodwill as of January 1, 2002. The adoption of this
         statement did not have a material impact on the Company's financial
         position or results of operations with the exception of no longer
         amortizing goodwill.

         Effective October 1, 2000, the Company adopted SFAS No. 133,
         "Accounting for Derivative Instruments and Hedging Activities" which
         establishes accounting and reporting standards for derivative
         instruments and requires that an entity recognize all derivatives as
         either assets or liabilities in the balance sheet and measure those
         instruments at fair value. Upon implementation of

                                       39
<PAGE>

         SFAS No. 133, $56.1 million of securities classified as
         held-to-maturity were redesignated as available-for-sale or trading.
         The securities had a fair value of $56.1 million. The Company has no
         derivative instruments. Management believes the implementation of this
         pronouncement did not have any other material effect on the Company's
         financial statements.

B.       ACQUISITIONS

         On September 13, 2002, the Company acquired ENB Bankshares, Inc. of
         Dallas, for an aggregate cash purchase price of $10.4 million. ENB
         Bankshares, Inc. is the privately held bank holding company of Eagle
         National Bank ("Eagle National"), which operates one banking office in
         North Dallas. Additionally during September 2002, the Company completed
         the operational integration of Eagle National Bank and Sterling Bank.
         This acquisition was accounted for using the purchase method of
         accounting. Goodwill of $5.7 million was recorded in connection with
         this acquisition.

         On December 17, 2001, the Company acquired Community Bancshares, Inc.
         and its subsidiary bank, Community Bank in a stock and cash merger. The
         shareholders of Community Bancshares, Inc. received $14.6 million in
         cash and 1,443,753 shares of the Company's common stock for all the
         outstanding common stock of Community Bancshares, Inc. Community Bank
         operated two banking offices in west Houston. As of December 31, 2001,
         Community Bank had total assets of $155 million, loans of $80 million
         and deposits of $114 million. The Company merged Community Bank into
         Sterling Bank in May of 2002. This acquisition was accounted for using
         the purchase method of accounting. Goodwill of $28.7 million was
         recorded.

         On August 23, 2001, the Company acquired Lone Star Bancorporation, Inc.
         and its subsidiary bank, Lone Star Bank in a stock-for-stock merger.
         The shareholders of Lone Star Bancorporation, Inc. received an
         aggregate of 1.76 million shares of the Company's common stock for all
         the outstanding common stock of Lone Star Bancorporation, Inc. The
         stock issuance occurred prior to the stock split in September 2001. All
         previously reported amounts have been restated to reflect this
         transaction which was accounted for using the "pooling of interests"
         method. Lone Star Bank operated four banking offices in the Houston
         metropolitan area. As of December 31, 2001, Lone Star Bank had total
         assets of $170 million, loans of $123 million and deposits of $154
         million. The Company merged Lone Star Bank into Sterling Bank in the
         February of 2002.

         On March 22, 2001, the Company acquired CaminoReal Bancshares of Texas,
         Inc. and its subsidiary bank, CaminoReal Bank, National Association,
         for an aggregate cash purchase price of $51.8 million. CaminoReal Bank
         has four banking offices in San Antonio, Texas and four banking offices
         in the south Texas cities of Eagle Pass, Carrizo Springs, Crystal City
         and Pearsall. During June 2001, the Company completed the operational
         integration of CaminoReal Bank and Sterling Bank. This acquisition was
         accounted for using the purchase method of accounting. Goodwill of
         $21.2 million was recorded.

C.       CASH AND CASH EQUIVALENTS

         The Bank is required by the Board of Governors of the Federal Reserve
         System (the "FRB") to maintain average reserve balances. "Cash and cash
         equivalents" in the consolidated balance sheets includes amounts so
         restricted of approximately $4.4 million at December 31, 2002 and $5.6
         million at December 31, 2001.

                                       40
<PAGE>

D.       SECURITIES

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

<TABLE>
<CAPTION>
                                                          DECEMBER 31, 2002
                                          ------------------------------------------------
                                                        GROSS        GROSS
                                          AMORTIZED   UNREALIZED   UNREALIZED
                                             COST        GAINS       LOSSES     FAIR VALUE
                                          ---------   ----------   ----------   ----------
<S>                                       <C>         <C>          <C>          <C>
AVAILABLE-FOR-SALE
Obligations of U.S. government
    agencies                              $ 38,608     $    800     $     20     $ 39,388
Obligations of states and political
    subdivisions                             4,506          189            -        4,695
Mortgage-backed securities and
    collateralized mortgage obligations    178,638        5,272          111      183,799
Other equity securities                     23,277            6                    23,283
                                          --------     --------     --------     --------
Total                                     $245,029     $  6,267     $    131     $251,165
                                          ========     ========     ========     ========
HELD-TO-MATURITY
Obligations of states and political
    subdivisions                          $ 56,128     $  2,844     $      1     $ 58,971
Mortgage-backed securities and
    collateralized mortgage obligations      5,761           96           43        5,814
                                          --------     --------     --------     --------
Total                                     $ 61,889     $  2,940     $     44     $ 64,785
                                          ========     ========     ========     ========
</TABLE>

<TABLE>
<CAPTION>
                                                           DECEMBER 31, 2001
                                           --------------------------------------------------
                                                          GROSS         GROSS
                                           AMORTIZED   UNREALIZED    UNREALIZED
                                              COST        GAINS        LOSSES      FAIR VALUE
                                           ---------   ----------    ----------    ----------
<S>                                        <C>         <C>           <C>           <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities and obligations
    of U.S. government agencies            $ 25,217     $    767       $   44        $ 25,940
Obligations of states and political
    subdivisions                              7,432          174            -           7,606
Mortgage-backed securities
    collateralized mortgage obligations     207,235        5,141           53         212,323
Other equity securities                       5,235            -           96           5,139
                                           --------     --------       ------        --------
Total                                      $245,119     $  6,082       $  193        $251,008
                                           ========     ========       ======        ========
HELD-TO-MATURITY
U.S. Treasury securities and obligations
    of U.S. government agencies            $  2,997     $     25       $    -        $  3,022
Obligations of states and political
    subdivisions                             67,379        1,569            5          68,943
Mortgage-backed securities and
    collateralized mortgage obligations       8,032           77          146           7,963
                                           --------     --------       ------        --------
Total                                      $ 78,408     $  1,671       $  151        $ 79,928
                                           ========     ========       ======        ========
</TABLE>

                                       41

<PAGE>

         The amortized cost and fair value of securities at December 31, 2002,
         by contractual maturity, 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. All amounts are shown in thousands.

<TABLE>
<CAPTION>
                                             HELD-TO-MATURITY          AVAILABLE-FOR-SALE
                                         -----------------------    -----------------------
                                         AMORTIZED                  AMORTIZED
                                            COST      FAIR VALUE       COST      FAIR VALUE
                                         ---------    ----------    ---------    ----------
<S>                                      <C>          <C>           <C>          <C>
Due in one year or less                  $  17,917    $   18,161    $  17,769    $   17,989
Due after one year through five years       22,178        23,548       24,914        25,628
Due after five years through ten years      16,033        17,262          379           407
Due after ten years                              -             -           52            59
Mortgage-backed securities and
  collateralized mortgage obligations        5,761         5,814      178,638       183,799
Other equity securities                          -             -       23,277        23,283
                                         ---------    ----------    ---------    ----------
                                         $  61,889    $   64,785    $ 245,029    $  251,165
                                         =========    ==========    =========    ==========
</TABLE>

         The Company does not own any securities of any one issuer (other than
         the U.S. government and its agencies) of which aggregate adjusted cost
         exceeds 10% of the consolidated shareholders' equity at December 31,
         2002 or 2001.

         Securities with carrying values totaling $260.4 million and fair values
         totaling $269.2 million at December 31, 2002 were pledged to secure
         public deposits and Federal Home Loan Bank advances.

E.       LOANS

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

<TABLE>
<CAPTION>
                                                   DECEMBER 31,
                                           -----------------------------
                                                2002            2001
                                           -------------    ------------
<S>                                        <C>              <C>
Domestic
    Commercial, financial and industrial   $     585,685    $   505,528
    Real estate - commercial                     624,535        529,789
    Real estate - mortgage                       200,755        185,916
    Real estate - construction                   370,360        281,388
    Consumer                                     149,798        151,873
Foreign
    Commercial and industrial                      7,207          7,594
    Other loans                                    5,226          4,760
Unearned premium (discount)                           (5)           (60)
                                           -------------    -----------
       Total loans held for investment         1,943,561      1,666,788
Loans held for sale
    Commercial, financial and industrial           2,624              -
    Real estate - commercial                       3,062              -
    Real estate - mortgage                       695,615        261,505
                                           -------------    -----------
       Total loans                         $   2,644,862    $ 1,928,293
                                           =============    ===========
</TABLE>

                                       42
<PAGE>
      The recorded investment in impaired loans under SFAS No. 114 is
      approximately $81.8 million and $65.6 million, at December 31, 2002 and
      2001, respectively. Under SFAS No. 114, such impaired loans required an
      allowance for credit losses of approximately $14.0 million and $16.4
      million, respectively.

      The average recorded investment in impaired loans for the years ended
      December 31, 2002, 2001 and 2000 was $72.2 million, $56.4 million and
      $40.6 million, respectively.

      Loan maturities and rate sensitivity of the loan portfolio, excluding real
      estate - mortgage and consumer and unearned discount, at December 31, 2002
      are as follows (in thousands):

<TABLE>
<CAPTION>
                                                        DUE AFTER ONE
                                        DUE IN ONE       YEAR THROUGH      DUE AFTER
                                       YEAR OR LESS       FIVE YEARS       FIVE YEARS           TOTAL
                                       ------------     -------------      ----------         ----------
<S>                                    <C>              <C>                <C>                <C>
Commercial, financial and industrial    $  461,888        $  122,367       $    4,054         $  588,309
Real estate - commercial                   374,434           230,263           22,900            627,597
Real estate - construction                 295,166            68,945            6,249            370,360
Foreign loans                                6,835             1,094            1,721              9,650
                                        ----------        ----------       ----------         ----------
Total loans                             $1,138,323        $  422,669       $   34,924         $1,595,916
                                        ==========        ==========       ==========         ==========

Loans with a fixed interest rate        $  130,683        $  418,037       $   34,924         $  583,644
Loans with a floating interest rate      1,007,640             4,632                -          1,012,272
                                        ----------        ----------       ----------         ----------
Total loans                             $1,138,323        $  422,669       $   34,924         $1,595,916
                                        ==========        ==========       ==========         ==========
</TABLE>

      As of December 31, 2002 and 2001, loans outstanding to directors, officers
      and their affiliates were approximately $11.5 million and $13.1 million,
      respectively. In the opinion of management, all transactions entered into
      between the Bank and such related parties have been and are, in the
      ordinary course of business, made on the same terms and conditions as
      similar transactions with unaffiliated persons.

      An analysis of activity with respect to these related-party loans is as
      follows (in thousands):

<TABLE>
<CAPTION>
                                                 YEAR ENDED
                                                DECEMBER 31,
                                           --------------------
                                             2002         2001
                                           ---------   --------
<S>                                        <C>         <C>
Beginning balance                          $ 13,148    $ 14,971
New loans and reclassified related loans        869      18,573
Loans to insiders/directors who resigned       (428)     (3,653)
Repayments                                   (2,075)    (16,743)
                                           --------    --------
Ending balance                             $ 11,514    $ 13,148
                                           ========    ========
</TABLE>

                                       43
<PAGE>

F.    NONACCRUAL, PAST-DUE AND RESTRUCTURED LOANS

      The following table presents information relating to nonaccrual, past-due
      and restructured loans (in thousands):

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           -----------------
                                                             2002      2001
                                                           -------   -------
<S>                                                        <C>       <C>
Nonaccrual loans                                           $19,654   $14,179
Loans 90 days or more past due, not on nonaccrual status       984     1,360
Restructured loans, performing                                   -        16
                                                           -------   -------
                                                           $20,638   $15,555
                                                           =======   =======
</TABLE>

      For the years ended December 31, 2002 and 2001, interest foregone on
      nonaccrual loans was approximately $1.1 million and $766 thousand,
      respectively.

G.    ALLOWANCE FOR CREDIT LOSSES

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

<TABLE>
<CAPTION>
                                      YEAR ENDED DECEMBER 31,
                                --------------------------------
                                  2002        2001         2000
                                --------    --------    --------
<S>                             <C>         <C>         <C>
Balance at beginning of year    $ 22,927    $ 16,862    $ 13,998
  Provisions                      14,018      11,684       9,668
  Loans charged off               11,704       9,823       7,767
  Loan recoveries                 (1,724)     (1,446)       (963)
                                --------    --------    --------
    Net loans charged off          9,980       8,377       6,804
  Allowance from acquisitions        656       2,758           -
                                --------    --------    --------
Balance at end of year          $ 27,621    $ 22,927    $ 16,862
                                ========    ========    ========
</TABLE>

H.    PREMISES AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                       DECEMBER 31,
                                                -------------------------
                                                     2002          2001
                                                -------------   ---------
<S>                                             <C>             <C>
Land                                             $  12,585      $  11,151
Buildings and improvements                          40,685         41,926
Furniture, fixtures and equipment                   49,747         43,294
                                                 ---------      ---------
                                                   103,017         96,371
Less accumulated depreciation and amortization     (46,313)       (42,196)
                                                 ---------      ---------
Total                                            $  56,704      $  54,175
                                                 =========      =========
</TABLE>

                                       44
<PAGE>

I.    INTANGIBLE ASSETS

      Under the provisions of SFAS No. 142, goodwill was subjected to an initial
      assessment for impairment. The Company completed its initial assessment
      and determined that there was no impairment of goodwill as of January 1,
      2002. The Company will review goodwill on an annual basis for impairment
      or as events occur or circumstances change that would more likely than not
      reduce fair value of a reporting unit below its carrying amount. The
      changes in the carrying amount of goodwill by reportable segment for the
      year ended December 31, 2001 and 2002 are as follows (in thousands):

<TABLE>
<CAPTION>
                                        COMMERCIAL BANKING
                               -------------------------------------------
                                                                   SOUTH      MORTGAGE
                                HOUSTON   SAN ANTONIO    DALLAS    TEXAS       BANKING      TOTAL
                               ---------  -----------  ---------  --------    ---------   ---------
<S>                            <C>        <C>          <C>        <C>         <C>         <C>
Balance, January 1, 2001       $  1,110   $       -    $      -   $      -    $  4,842    $  5,952
  Amortization                     (185)       (583)          -       (205)       (279)     (1,252)
  Purchase price adjustment           -           -           -          -         217         217
  CaminoReal acquisition              -      15,662           -      5,517           -      21,179
  Community acquisition          28,716           -           -          -           -      28,716
                               --------   ---------    --------   --------    --------    --------
Balance, December 31, 2001       29,641      15,079           -      5,312       4,780      54,812
  Purchase price adjustment         (28)          -           -          -         838         810
  Eagle National acquisition          -           -       5,662          -           -       5,662
                               --------   ---------    --------   --------    --------    --------
Balance, December 31, 2002     $ 29,613   $  15,079    $  5,662   $  5,312    $  5,618    $ 61,284
                               ========   =========    ========   ========    ========    ========
</TABLE>

      The Company adopted SFAS No. 142, in its entirety, effective January 1,
      2002. The following presents the net income for 2002 and 2001 that would
      have been reported, exclusive of goodwill amortization (in thousands).

<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                   ---------------------
                                                      2002        2001
                                                   --------     --------
<S>                                                <C>          <C>
Reported net income                                $ 36,551     $ 30,401
Add: Goodwill amortization, net of taxes                  -          814
                                                   --------     --------
Adjusted net income                                $ 36,551     $ 31,215
                                                   ========     ========

Reported diluted earnings per share                $   0.82     $   0.71
Add: Goodwill amortization, net of taxes                  -         0.02
                                                   --------     --------
Adjusted diluted earnings per share                $   0.82     $   0.73
                                                   ========     ========
</TABLE>

                                       45
<PAGE>

      The changes in the carrying amounts of intangible assets other than
      goodwill for the year ended December 31, 2002 and 2001 are as follows (in
      thousands):

<TABLE>
<CAPTION>
                                     CORE        MORTGAGE
                                    DEPOSIT     SERVICING
                                   INTANGIBLE     RIGHTS        TOTAL
                                   ----------   ---------     --------
<S>                                <C>          <C>           <C>
Balance, January 1, 2001           $     -      $    907      $    907
  Amortization                           -        (1,154)       (1,154)
  Servicing rights originated            -        19,839        19,839
  Community acquisition              2,036             -         2,036
                                   -------      --------      --------
Balance, December 31, 2001           2,036        19,592        21,628
  Amortization and impairment         (426)      (13,150)      (13,576)
  Servicing rights originated            -        20,025        20,025
  Eagle National acquistition          486             -           486
                                   -------      --------      --------
  Balance, December 31, 2002       $ 2,096      $ 26,467      $ 28,563
                                   =======      ========      ========
</TABLE>

      As of December 31, 2002 and 2001, SCMC serviced loans with unpaid
      principal balances of approximately $2.7 billion and $1.3 billion,
      respectively. These amounts include loans that are held in the warehouse
      until shipped to the investor, typically 30 days. Escrow funds totaling
      approximately $9.7 million and $6.1 million at December 31, 2002 and 2001,
      respectively, are held in trust for mortgagors at various financial
      institutions. The loans and escrow funds are not included in the
      accompanying balance sheet.

      The projected amortization for the intangible assets other than goodwill
      as of December 31, 2002 is as follows (in thousands):

<TABLE>
<CAPTION>
                       CORE        MORTGAGE
                      DEPOSIT     SERVICING
                     INTANGIBLE     RIGHTS     TOTAL
                     ----------   ---------   -------
<S>                  <C>          <C>         <C>
2003                  $   443     $ 7,340     $ 7,783
2004                      358       7,370       7,728
2005                      292       7,336       7,628
2006                      241       4,421       4,662
2007                      201           -         201
Amount thereafter         561           -         561
                      -------     -------     -------
                      $ 2,096     $26,467     $28,563
                      =======     =======     =======
</TABLE>

                                       46
<PAGE>

J.    DEPOSITS

      Included in certificates of deposit and other time deposits are
      certificates of deposit in amounts of $100,000 or more. The remaining
      maturities of these certificates are summarized as of December 31, 2002 as
      follows (in thousands):

<TABLE>
<S>                                <C>
Three months or less               $  239,661
Over three through six months         103,832
Over six through twelve months         81,420
Thereafter                             52,024
                                   ----------
                                   $  476,937
                                   ==========
</TABLE>

      Interest expense for certificates of deposit in excess of $100,000 was
      approximately $11.0 million, $15.0 million, and $14.1 million for the
      years ended December 31, 2002, 2001 and 2000, respectively.

      At December 31, 2002, the Bank has $99.5 million in brokered deposits.
      These deposits will mature within year 2003. Deposits of $90.4 million
      will mature in the next six months and the remaining balance of $9.1
      million in the second half of year 2003. There are no major concentrations
      of deposits.

K.    OTHER BORROWED FUNDS

      Other borrowed funds are summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                           2002         2001
                                                         --------     --------
<S>                                                      <C>          <C>
Federal Home Loan Bank advances                          $490,790     $146,000
Federal funds purchased with correspondent banks           18,800       10,950
Securities sold under agreements to repurchase                  -       18,248
Promissory notes payable to unaffiliated third party            -        5,100
                                                         --------     --------
                                                         $509,590     $180,298
                                                         ========     ========
</TABLE>

      The Bank has an available line of credit with the Federal Home Loan Bank
      of Dallas, which allows the Bank to borrow on a collateralized basis. At
      December 31, 2002, the Bank had $490.8 million, of which $475 million
      bearing an interest rate of 1.30% and $15.8 million bearing an interest
      rate of 1.35%, borrowed under this line of credit, with a maturity of two
      days. These borrowings are collaterilized by single family residential
      mortgage loans. The amounts were repaid in January 2003.

      Securities sold under agreements to repurchase generally mature within one
      to four days from the transaction date. However, the Bank eliminated the
      Repurchase Agreement Sweep product as of

                                       47
<PAGE>

      December 31, 2002 because of the smaller number of customers utilizing the
      service and it was uncompetitive with other Bank products. Information
      concerning securities sold under agreements to repurchase during the year
      2002 is summarized as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                   2002         2001
                                                 -------      --------
<S>                                              <C>          <C>
Average balance during the year                  $13,559      $15,074
Average interest rate during the year               0.96%        2.67%
Maximum month-end balance during the year        $19,796      $18,248
Average interest rate at the end of the year           -         1.16%
</TABLE>

      The Bank has available lines for federal funds purchased at correspondent
      banks. As of December 31, 2002, federal funds outstanding with
      correspondent banks was $18.8 million, of which $18.5 million will mature
      in the next three months. The amounts will be repaid when they mature.

L.    NOTES PAYABLE

      Effective February 2, 2002, the Company entered into a Credit Agreement
      with Wells Fargo Bank Minnesota, National Association which provides for a
      $20 million revolving credit facility. The Company currently has $20
      million outstanding under the terms of the credit facility. The original
      term of the credit facility is for a one year period ending on February 2,
      2003. This line of credit was renewed on February 2, 2003 by the Company
      with the Wells Fargo Bank, National Association, successor by assignment
      to Wells Fargo Bank Minnesota, National Association. The note matures on
      February 1, 2006. The interest rate payable by the Company on all funds
      drawn under the credit facility is 1.95% in excess of the Federal Funds
      Rate in effect from time to time. The indebtedness under the credit
      facility is guaranteed by Sterling Bancorporation, Inc. The Credit
      Agreement contains various covenants and restrictions including, among
      other things, (i) limitations on dividends, redemptions and repurchases of
      capital stock, (ii) limitations on the incurrence of indebtedness, (iii)
      limitations on mergers, acquisitions and the sale of all or substantially
      all of the Company's assets, and (iv) maintenance of certain financial
      covenants by the Company and the Bank. Included within these financial
      covenants is a financial covenant requiring the Bank to maintain its
      categorization as "well capitalized." At December 31, 2002, the most
      recent report filed by the Bank categorized it as "adequately capitalized"
      under applicable regulatory requirements. Wells Fargo has provided to the
      Company a written waiver with respect to this financial covenant which is
      effective through March 31, 2003. Although the covenants and restrictions
      could restrict the Company's corporate activities, the Company does not
      anticipate that the credit facility or the covenants and conditions
      contained therein will have any material impact upon the Company or its
      operations.

      Upon the acquisition of ENB Bancshares, Inc. in September 2002, the
      Company assumed a note payable to Wells Fargo Bank Minnesota, National
      Association. The balance of $1.1 million was repaid January 2, 2003. In
      addition the Company assumed notes payable totaling $879 thousand to two
      executives with the acquisition of Community Bancshares, Inc. in December
      2001. Notes payable of $519 thousand were repaid in August 2002. The
      remaining notes payable of $360 thousand as of December 31, 2002 will
      mature January 11, 2004.

M.    TRUST PREFERRED SECURITIES

      On September 26, 2002, Sterling Bancshares Capital Trust III ("Trust
      III"), a trust formed under the laws of the State of Delaware in February,
      2001, issued 1,250,000 8.30% Trust Preferred Securities

                                       48
<PAGE>

      with an aggregate liquidation value of $31,250,000. Concurrent with the
      issuance of the 8.30% Trust Preferred Securities, Trust III issued trust
      common securities to the Company in the aggregate liquidation value of
      $966,500. The proceeds of the issuance of the 8.30% Trust Preferred
      Securities and trust common securities were invested the Company's 8.30%
      Junior Subordinated Deferrable Interest Debentures (the "8.30% Junior
      Subordinated Debentures") issued by the Company. The 8.30% Junior
      Subordinated Debentures will mature on September 26, 2032, which date may
      be shortened to a date not earlier than September 26, 2007 if certain
      conditions are met (including the Company having received prior approval
      of the Federal Reserve and any other required regulatory approvals). The
      8.30% Trust Preferred Securities will be subject to mandatory redemption
      in a like amount contemporaneously with the optional prepayment of the
      8.30% Junior Subordinated Debentures by the Company. The 8.30% Junior
      Subordinated Debentures may be prepaid upon the occurrence and
      continuation of certain events including a change in the tax status or
      regulatory capital treatment of the 8.30% Trust Preferred Securities. In
      each case, redemption will be made at a price equal to 100% of the face
      amount of the 8.30% Trust Preferred Securities, plus the accrued and
      unpaid distributions thereon through the redemption date.

      In August 2002, the Company formed Sterling Bancshares Statutory Trust
      One, a trust formed under the laws of the State of Connecticut ("Statutory
      Trust One"). On August 30, 2002, Statutory Trust One completed a private
      placement of $20,000,000 of Floating Rate Trust Preferred Securities to an
      institutional buyer. The proceeds from the sale were invested in the
      Floating Rate Junior Subordinated Deferrable Interest Debentures issued by
      the Company. The Floating Rate Trust Preferred Securities and the Floating
      Rate Junior Subordinated Deferrable Interest Debentures have a floating
      rate equal to the three-month LIBOR plus 3.45%, which resets quarterly.
      For the first five years, there is a ceiling on the three-month LIBOR of
      8.50% resulting in a ceiling on the floating rate of 11.95% during this
      period. As of December 31, 2002, the rate was 4.85%. The Floating Rate
      Junior Subordinated Debentures will mature on August 30, 2032, which date
      may be shortened to a date not earlier than August 30, 2007 if certain
      conditions are met (including the Company having received prior approval
      of the Federal Reserve and any other required regulatory approvals). The
      Floating Rate Trust Preferred Securities will be subject to mandatory
      redemption in a like amount contemporaneously with the optional prepayment
      of the Floating Rate Junior Subordinated Deferrable Interest Debentures by
      the Company. The Floating Rate Junior Subordinated Deferrable Interest
      Debentures may be prepaid upon the occurrence and continuation of certain
      events including a change in the tax status or regulatory capital
      treatment of the Floating Rate Trust Preferred Securities. In each case,
      redemption will be made at a price equal to 100% of the face amount of the
      Floating Rate Trust Preferred Securities, plus the accrued and unpaid
      distributions thereon through the redemption date. As a result during the
      fourth quarter of 2002, The Company recorded a cost relating to the early
      redemption.

      In February 2001, the Company formed Sterling Bancshares Capital Trust II
      ("Trust II") and Trust III. On March 21, 2001, Trust II issued 1,150,000
      9.20% Trust Preferred Securities with an aggregate liquidation value of
      $28,750,000. Concurrent with the issuance of the 9.20% Trust Preferred
      Securities, Trust II issued trust common securities to the Company in the
      aggregate liquidation value of $889,175. The proceeds of the issuance of
      the 9.20% Trust Preferred Securities and trust common securities were
      invested in the Company's 9.20% Junior Subordinated Deferrable Interest
      Debentures (the "9.20% Junior Subordinated Debentures"). The proceeds of
      the issuance of the 9.20% Junior Subordinated Debentures were invested in
      the 9.20% Junior Subordinated Deferrable Interest Debentures (the "9.20%
      Junior Subordinated Debentures") issued by the Company. The 9.20% Junior
      Subordinated Debentures will mature on March 21, 2031, which date may be
      shortened to a date not earlier than March 21, 2006 if certain conditions
      are met (including the Company having received prior approval of the
      Federal Reserve and any other required regulatory approvals). The 9.20%
      Trust Preferred Securities will be subject to mandatory redemption if the
      9.20% Junior Subordinated Debentures are repaid by the Company. The 9.20%

                                       49
<PAGE>

      Junior Subordinated Debentures may be prepaid if certain events occur,
      including a change in the tax status or regulatory capital treatment of
      the 9.20% Trust Preferred Securities. In each case, redemption will be
      made at par, plus the accrued and unpaid distributions thereon through the
      redemption date.

      In June 1997, the Company formed Sterling Bancshares Capital Trust I, a
      trust formed under the laws of the State of Delaware (the "Trust I"). The
      Trust I issued 1,150,000 9.28% Trust Preferred Securities with an
      aggregate liquidation value of $28,750,000. Concurrent with the issuance
      of the 9.28% Trust Preferred Securities, Trust I issued trust common
      securities to the Company in the aggregate liquidation value of $889,200.
      The proceeds of the issuance of the 9.28% Trust Preferred Securities and
      trust common securities were invested in the Company's 9.28% Junior
      Subordinated Deferrable Interest Debentures (the "9.28% Junior
      Subordinated Debentures"). The proceeds of the issuance of the 9.28%
      Junior Subordinated Debentures were invested in the 9.28% Junior
      Subordinated Deferrable Interest Debentures (the "9.28% Junior
      Subordinated Debentures") issued by the Company. With the proceeds
      received by the Company from the sale of its 8.30% Junior Subordinated
      Debentures to Trust III on September 26, 2002, the Company, on November 1,
      2002, prepaid all $29,639,200 of the 9.28% Junior Subordinated Deferrable
      Interest Debentures previously issued by the Company to Trust I. Upon the
      prepayment, the 9.28% Trust Preferred Securities and the 9.28% Trust
      Common Securities issued by Trust I were mandatorily redeemed. In each
      case, the redemption was made at par, plus the accrued and unpaid
      distributions through November 1, 2002.

N.    INCOME TAXES

      The components of the provision for income taxes follow (in thousands):

<TABLE>
<CAPTION>
                            YEAR ENDED DECEMBER 31,
                     -----------------------------------
                       2002          2001         2000
                     --------      --------     --------
<S>                  <C>           <C>          <C>
Current expense      $ 18,638      $  7,282     $ 13,011
Deferred benefit         (560)        9,128         (370)
                     --------      --------     --------
  Total              $ 18,078      $ 16,410     $ 12,641
                     ========      ========     ========
</TABLE>

      The provision for income taxes differs from the amount computed by
      applying the federal income tax statutory rate on operations as follows
      (in thousands):

                                       50
<PAGE>

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                       ------------------------------------
                                                         2002          2001          2000
                                                       --------      --------      --------
<S>                                                    <C>           <C>           <C>
Taxes calculated at statutory rate                     $ 19,120      $ 16,384      $ 14,063
Increase (decrease) resulting from:
  Tax-exempt interest income                             (1,011)       (1,104)       (1,255)
  Tax-exempt income from bank-owned life insurance         (729)         (717)         (661)
  Goodwill amortization                                       -           342           157
  Adjustments to valuation allowance                          -             -             -
  Other, net                                                698         1,505           337
                                                       --------      --------      --------
Income tax expense                                     $ 18,078      $ 16,410      $ 12,641
                                                       ========      ========      ========
</TABLE>

      Significant deferred tax assets and liabilities at December 31, 2002 and
      2001, were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                            ----------------------
                                                              2002          2001
                                                            --------      --------
<S>                                                         <C>           <C>
Deferred tax assets:
 Real estate acquired by foreclosure                        $     82      $     31
 Allowance for credit losses                                   9,667         7,455
 Net operating loss carryforward                                 133           174
 Deferred compensation                                         2,310         1,314
 Other                                                           589           128
                                                            --------      --------
  Total deferred tax assets                                   12,781         9,102
Deferred tax liabilities:
 Net unrealized gains on available-for-sale securities         2,147         1,939
 Depreciable assets                                            1,345         1,159
 Earnings from Sterling Capital Mortgage Company                 396           396
 Federal Home Loan Bank stock dividends                        1,028           867
 Originated mortgage servicing rights                          9,264         7,385
 Insurance                                                     1,554             -
 Other                                                           170           831
                                                            --------      --------
  Total deferred tax liabilities                              15,904        12,577
                                                            --------      --------
Net deferred tax liabilities before valuation allowance       (3,123)       (3,475)
Valuation allowance                                              262           262
                                                            --------      --------
Net deferred tax liabilities                                $ (3,385)     $ (3,737)
                                                            ========      ========
</TABLE>

O.    EMPLOYEE BENEFITS

      PROFIT SHARING PLAN - The Company's profit sharing plan includes
      substantially all employees. Contributions to the plan are made at the
      discretion of the Board of Directors but generally equal up to 10% of the
      Company's pretax income, subject to IRS limitations. Employee
      contributions to 401(K) plan accounts are optional. Beginning in 1997, the
      Company matched 50 percent of the employee's contribution, up to 6 percent
      of the employee's base pay. Profit sharing contributions are accrued and
      funded currently. Total profit sharing expense for 2002, 2001 and 2000 was
      approximately $5.1 million, $3.9 million, and $2.9 million, respectively.

      STOCK-BASED COMPENSATION - During April 1994, the Company adopted the
      "1994 Stock Incentive Plan (the "Stock Plan"). The Stock Plan, as amended,
      provides for a maximum of 3,900,000 shares (after adjustment for stock
      splits) of the Company's common stock to be issued. No options or
      performance shares may be granted under the Stock Plan after April 2004.
      Options are granted to officers and employees at exercise prices
      determined by the Human Resources Programs 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 and vest ratably
      over a four-year period. Options

                                       51
<PAGE>

      granted under the plan must be exercised not later than ten years from the
      date of grant. Stock grant awards may also be made under the Stock Plan
      with compensation expense recognized for any stock grant awards. A total
      of 19,685, 20,264, and 4,250 stock grants were awarded under the Stock
      Plan during 2002, 2001 and 2000, respectively.

      A summary of changes in outstanding options, as restated for stock splits,
      is as follows (shares in thousands):

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                            ------------------------------------------------------------------
                                                 2002                   2001                    2000
                                            --------------------  ---------------------  ---------------------
                                                        WEIGHTED               WEIGHTED               WEIGHTED
                                                        AVERAGE                AVERAGE                AVERAGE
                                                        EXERCISE               EXERCISE               EXERCISE
                                            SHARES       PRICE    SHARES        PRICE    SHARES       PRICE
                                            ------     ---------  ------      ---------  ------      ---------
<S>                                         <C>        <C>        <C>         <C>        <C>         <C>
Shares under option, beginning of year      2,301      $    8.63   1,800      $    6.45   1,574      $   6.12
  Shares granted                              221          12.23     880          12.28     455          7.88
  Shares canceled/expired                     (88)         11.85    (122)          9.48     (80)         7.61
  Shares exercised                           (164)          5.75    (257)          5.40    (149)         3.31
                                            -----      ---------   -----      ---------   -----      --------
Shares under option, end of year            2,270      $    9.07   2,301      $    8.63   1,800      $   6.45
                                            =====      =========   =====      =========   =====      ========

Shares exercisable, end of year             1,222      $    7.07     935      $    5.54     870      $   4.82
                                            =====      =========   =====      =========   =====      ========

Shares reserved for future granting
 of options, end of year                      408                    635                    615
                                            =====                  =====                  =====

Weighted average fair value of options
 granted during the year                                $   3.35              $    3.64              $   2.81
                                                        ========              =========              ========
</TABLE>

      The fair value of options at date of grant was estimated using the
      Black-Scholes option-pricing model with the following weighted-average
      assumptions:

<TABLE>
<CAPTION>
                                2002       2001       2000
                               ------     ------     ------
<S>                            <C>        <C>        <C>
Expected life (years)           4.52       4.82       5.17
Risk free interest rate         2.55%      4.22%      5.03%
Volatility                     29.29%     29.35%     28.97%
Dividend yield                  1.47%      1.28%      1.11%
</TABLE>

                                       52
<PAGE>
      The following table presents information relating to the Company's stock
      options outstanding at December 31, 2002 (share data in thousands):

<TABLE>
<CAPTION>
                                               OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE
                              --------------------------------------------------   -------------------------------
                                                                WEIGHTED-AVERAGE
                                 NUMBER      WEIGHTED-AVERAGE      REMAINING         NUMBER       WEIGHTED-AVERAGE
                              OUTSTANDING     EXERCISE PRICE     LIFE (YEARS)      EXERCISABLE     EXERCISE PRICE
<S>                           <C>            <C>                <C>                <C>            <C>
RANGE OF EXERCISE PRICES
    $ 0.00 - $ 1.56                 6           $      -               8.6                -            $     -
    $ 1.57 - $ 3.13               285               2.36               1.8              285               2.36
    $ 3.14 - $ 4.69                82               3.84               3.1               82               3.84
    $ 4.70 - $ 6.26                71               5.88               4.9               59               5.85
    $ 6.27 - $ 7.82               465               7.12               5.8              307               7.16
    $ 7.83 - $ 9.39               291               8.72               5.9              228               8.75
    $ 9.40 - $10.95               125              10.11               6.8               77              10.06
    $10.96 - $12.51               502              11.70               8.0              107              11.75
    $12.52 - $14.08               273              13.14               8.3               43              12.97
    $14.09 - $15.64               170              15.30               8.4               34              15.50
                                -----           --------               ---            -----            -------
                                2,270           $   9.07               6.2            1,222            $  7.07
                                =====           ========               ===            =====            =======
</TABLE>

      ANNUAL RECONCILIATION OF REPORTED AND PRO FORMA NET INCOME AND EPS - If
      compensation cost for the Company's stock-based compensation plan had been
      determined based on the fair value at the grant dates for awards, there
      would have been no material impact on the Company's reported net income or
      earnings per share. Pro forma information regarding net income and
      earnings per share is required under Statement of Financial Accounting
      Standard No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation"
      and has been determined as if the Company accounted for its employee stock
      option plans under the fair value method of SFAS 123. The fair value of
      options was estimated using a Black-Scholes option pricing model. Option
      valuation models require use of highly subjective assumptions. Also,
      employee stock options have characteristics that are significantly
      different from those of traded options, including vesting provisions and
      trading limitations that impact their liquidity. Because employee stock
      options have differing characteristics and changes in the subjective input
      assumptions can materially affect the fair value estimate, the
      Black-Scholes valuation model does not necessarily provide a reliable
      measure of the fair value of employee stock options. The following table
      shows information related to stock-based compensation in both the reported
      and pro forma earnings per share amounts (dollars in thousands except for
      per share amounts):

<TABLE>
<CAPTION>
                                                           2002          2001           2000
                                                         --------     ----------     ----------
<S>                                                      <C>          <C>            <C>
Net Income, as reported                                  $ 36,551     $   30,401     $   27,540

Total stock-based employee compensation expense
determined under fair value based method for all
awards granted since January 1, 1995, net of related
tax effects                                                 1,050          1,116            686
                                                         --------     ----------     ----------
Pro Forma net income                                     $ 35,501     $   29,285     $   26,854
                                                         ========     ==========     ==========
Earnings per share:
  Basic- as reported                                     $   0.83     $     0.72     $     0.66
                                                         ========     ==========     ==========
  Basic- pro forma                                       $   0.81     $     0.69     $     0.65
                                                         ========     ==========     ==========
  Diluted - as reported                                  $   0.82     $     0.71     $     0.65
                                                         ========     ==========     ==========
  Diluted - pro forma                                    $   0.79     $     0.68     $     0.64
                                                         ========     ==========     ==========
</TABLE>

      STOCK PURCHASE PLAN - The Company offers the 1994 Employee Stock Purchase
      Plan (the "Purchase Plan"), which 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

                                       53
<PAGE>

      Plan provides for an aggregate of 675,000 shares of the Company's common
      stock to be issued under the Plan with no more than 67,500 shares
      available during any annual offering. The purchase price for shares
      available under the Purchase Plan is equal to the fair market value on the
      date of the offering. During 2002 and 2001, 13,016 and 5,448 shares,
      respectively, were subscribed for through payroll deduction for a maximum
      of two years. In 2001, 450 shares were purchased upon the offering. Shares
      are issued upon full payment.

P.    SHAREHOLDERS' EQUITY

      STOCK SPLITS - On July 24, 2001, the Board of Directors declared a
      three-for-two stock split that was effected in the form of a stock
      dividend on its common stock. Stockholders of record on September 4, 2001
      received one additional share of common stock for every two shares of the
      Company's common stock held on that date. Cash paid in lieu of fractional
      shares was based on the average of the high and low bids on the record
      date, as adjusted for the split. The payment date for the stock dividend
      was September 18, 2001.

      PREFERRED STOCK - The Board of Directors has approved the sale of
      convertible preferred stock in series pursuant to confidential private
      placement memoranda upon the opening of various banking offices. The
      shares are sold to investors who may assist in the business development
      efforts of the opening office and are convertible to common shares
      dependent on that banking office meeting certain performance and deposit
      growth goals. On March 7, 2002, the Company completed a private placement
      of 20,000 shares of the Company's Series I Convertible Preferred Stock.
      Shares of the Series I Preferred Stock will convert into shares of the
      Company's common stock based upon performance goals for the Dallas banking
      office for which such shares were issued. The conversion ratio ranges from
      1.25 shares of common stock if the performance goals are met prior to
      November 7, 2003, to 1.1 shares of common stock if the performance goals
      are met prior to November 7, 2004. After November 7, 2004, each share of
      Series I Preferred Stock will automatically convert into one share of
      common stock. During 2001, 11,500 shares of preferred stock under Series F
      issued in 1998 were converted into 11,500 common shares prior to the stock
      split in September 2001. At December 31, 2002, there are 59,000
      convertible preferred shares outstanding. These shares are convertible
      into a maximum of 98,125 shares of common stock if the performance and
      deposit growth goals of the banking offices are achieved.

                                       54

<PAGE>

Q.    EARNINGS PER COMMON SHARE

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

<TABLE>
<CAPTION>
                                                    2002       2001       2000
                                                   -----------------------------
                                                   AMOUNT     AMOUNT     AMOUNT
                                                   -------    -------    -------
<S>                                                <C>        <C>        <C>
Net income                                         $36,551    $30,401    $27,540
Basic:
    Weighted average shares outstanding             43,872     42,180     41,596
Diluted:
    Add incremental shares for:
      Assumed exercise of outstanding options          790        803        509
      Assumed conversion of preferred stock             94         61        107
                                                   -------    -------    -------
Total                                               44,756     43,044     42,212
                                                   =======    =======    =======
Earnings per share
    Basic                                          $  0.83    $  0.72    $  0.66
                                                   =======    =======    =======
    Diluted                                        $  0.82    $  0.71    $  0.65
                                                   =======    =======    =======
</TABLE>

      The incremental shares for the assumed exercise of the outstanding options
      was determined by application of the treasury stock method. The
      incremental shares for the conversion of the preferred stock was
      determined assuming applicable performance goals had been met.

      The Company did not have any antidilutive shares in 2002, 2001 and 2000.

R.    COMMITMENTS AND CONTINGENCIES

      LEASES - A summary as of December 31, 2002, of noncancelable future
      operating lease commitments follows (in thousands):

<TABLE>
<S>                                  <C>
2003                                 $ 3,702
2004                                   3,305
2005                                   2,522
2006                                   1,540
2007                                   1,398
Thereafter                             5,708
                                    --------
Total                               $ 18,175
                                    ========
</TABLE>

      Rent expense under all noncancelable operating lease obligations, net of
      income from noncancelable subleases aggregated, was approximately $8.1
      million, $5.6 million, and $3.7 million for the years ended December 31,
      2002, 2001 and 2000, respectively.

      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 such matters will not have a materially adverse impact on the
      consolidated financial statements.

                                       55

<PAGE>

S.    FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

      The Bank 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 Bank'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 notional amount of these instruments. The
      Bank 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 Bank (in thousands):

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                      --------------------------
                                                        2002              2001
                                                      --------          --------
<S>                                                   <C>               <C>
Commitments to extend credit                          $465,402          $344,507
Standby letters of credit                               18,296            19,470
Mortgages sold with recourse                           851,061           272,894
</TABLE>

      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 Bank evaluates each customer's creditworthiness on a case-by-case
      basis. The amount of collateral obtained, if considered necessary by the
      Bank upon extension of credit, is based on management's credit evaluation
      of the customer.

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

      The Bank's mortgage subsidiary, SCMC, sells mortgages in the secondary
      market either to dealers or investors. A portion of these loans are sold
      with recourse for a period which generally does not exceed one year. SCMC
      sells its non-conforming conventional loan production on a non-recourse
      basis. Other loans are sold with limited recourse.

      Regardless of the form of sale of loan production, and while SCMC
      generally does not retain primary credit risk, it does have potential
      liability under the representations and warranties it makes to purchasers
      and insurers of the loans. In the event of a breach of these
      representations and warranties, SCMC may be required to repurchase a
      mortgage loan. If SCMC is required to repurchase the mortgage loan or make
      additional payments to the purchaser, subsequent losses on the mortgage
      loan will be borne by SCMC. For the years ended December 2002 and 2001,
      these losses totaled $4.5 million and $0 respectively. As of December 31,
      2002 and 2001, loans sold with recourse totaled $851 million and $273
      million, respectively.

                                       56

<PAGE>

T.    REGULATORY MATTERS

      CAPITAL REQUIREMENTS - The Company is subject to various regulatory
      capital requirements administered by the 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 the Bank's classification
      under the regulatory framework for prompt corrective action are also
      subject to qualitative judgments by the regulators.

      To meet the capital adequacy requirements, the Company must maintain
      minimum capital amounts and ratios as defined in the regulations.
      Management believes, as of December 31, 2002 and 2001, that the Company
      and the Bank met all capital adequacy requirements to which they are
      subject.

                                       57

<PAGE>

      As of December 31, 2002, the most recent notification categorized the Bank
      as "adequate" 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. To be categorized as
      well capitalized, the Bank must maintain minimum total risk-based, Tier I
      risk-based, and Tier I leverage ratios as set forth in the table:

<TABLE>
<CAPTION>
                                                                                              TO BE WELL
                                                                                           CAPITALIZED UNDER
                                                                        FOR CAPITAL        PROMPT CORRECTIVE
                                                   ACTUAL            ADEQUACY PURPOSES     ACTION PROVISIONS
                                            --------------------   --------------------  --------------------
                                             AMOUNT       RATIO     AMOUNT       RATIO    AMOUNT       RATIO
                                            --------    --------   --------    --------  --------    --------
                                                          (IN THOUSANDS, EXCEPT PERCENTAGE AMOUNTS)
<S>                                         <C>         <C>        <C>         <C>       <C>         <C>
CONSOLIDATED:
As of December 31, 2002:
Total Capital (to Risk Weighted Assets)     $292,010      9.29%    $251,521      8.0%       N/A         N/A
Tier I Capital (to Risk Weighted Assets)     264,387      8.41%     125,761      4.0%       N/A         N/A
Tier I Capital (to Average Assets)           264,387      7.81%     135,358      4.0%       N/A         N/A

As of December 31, 2001:
Total Capital (to Risk Weighted Assets)     $239,234     10.66%    $179,538      8.0%       N/A         N/A
Tier I Capital (to Risk Weighted Assets)     216,307      9.64%      89,754      4.0%       N/A         N/A
Tier I Capital (to Average Assets)           216,307      8.40%     103,003      4.0%       N/A         N/A

STERLING BANK:
As of December 31, 2002:
Total Capital (to Risk Weighted Assets)     $308,426      9.82%    $251,221      8.0%    $314,027      10.0%
Tier I Capital (to Risk Weighted Assets)     280,803      8.94%     125,611      4.0%     188,416       6.0%
Tier I Capital (to Average Assets)           280,803      8.31%     135,244      4.0%     169,055       5.0%

As of December 31, 2001:
Total Capital (to Risk Weighted Assets)     $231,694     11.37%    $163,021      8.0%    $203,777      10.0%
Tier I Capital (to Risk Weighted Assets)     211,356     10.38%      81,447      4.0%     122,171       6.0%
Tier I Capital (to Average Assets)           211,356      8.73%      96,841      4.0%     121,052       5.0%

LONE STAR BANK:
As of December 31, 2001:
Total Capital (to Risk Weighted Assets)     $ 15,623     11.94%    $ 10,468      8.0%    $ 13,085      10.0%
Tier I Capital (to Risk Weighted Assets)      14,025     10.72%       5,233      4.0%       7,850       6.0%
Tier I Capital (to Average Assets)            14,025      8.23%       6,817      4.0%       8,521       5.0%

COMMUNITY BANK:
As of December 31, 2001:
Total Capital (to Risk Weighted Assets)     $  9,421     12.10%    $  6,229      8.0%    $  7,786      10.0%
Tier I Capital (to Risk Weighted Assets)       8,449     10.86%       3,112      4.0%       4,668       6.0%
Tier I Capital (to Average Assets)             8,449      5.46%       6,190      4.0%       7,737       5.0%
</TABLE>

      DIVIDEND RESTRICTIONS - Dividends paid by the Bank and the Company are
      subject to certain restrictions imposed by regulatory agencies. Under
      these restrictions there was an aggregate of approximately $67.2 million
      and $75.3 million available for payment of dividends at December 31, 2002,
      by the Bank and the Company, respectively.

                                       58

<PAGE>

U.    SEGMENTS

      The Company has two operating segments: commercial banking and mortgage
      banking. Each segment is managed separately because each business requires
      different marketing strategies and each offers different products and
      services.

      The accounting policies of the segments are the same as those described in
      Note A. The Company evaluates each segment's performance based on the
      profit or loss from its operations before income taxes. Intersegment
      financing arrangements are accounted for at current market rates as if
      they were with third parties.

      Summarized financial information by operating segment for the years ended
      December 31, 2002 and 2002 follows:

<TABLE>
<CAPTION>
                                                     2002                                              2001
                               --------------------------------------------------    ----------------------------------------
                                                                                     COMMERCIAL
                               COMMERCIAL BANKING  MORTGAGE BANKING     COMBINED       BANKING   MORTGAGE BANKING   COMBINED
                               ------------------------------------    ----------    ----------------------------  ----------
<S>                            <C>                 <C>                 <C>           <C>         <C>               <C>
Net interest income                $  147,095         $        -       $  147,095    $  122,547     $        -     $  122,547
Noninterest income                     29,611             67,013           96,624        24,650         41,975         66,625
                                   ----------         ----------       ----------    ----------     ----------     ----------
     Total revenue                    176,706             67,013          243,719       147,197         41,975        189,172

Provision for credit losses            11,700              2,318           14,018        11,684              -         11,684
Noninterest expense                   116,106             58,966          175,072       104,075         26,602        130,677
                                   ----------         ----------       ----------    ----------     ----------     ----------
Income before income taxes             48,900              5,729           54,629        31,438         15,373         46,811
Provision for income taxes             15,717              2,361           18,078        10,130          6,280         16,410
                                   ----------         ----------       ----------    ----------     ----------     ----------
     Net Income                    $   33,183         $    3,368       $   36,551    $   21,308     $    9,093     $   30,401
                                   ==========         ==========       ==========    ==========     ==========     ==========

Total assets                       $3,558,529         $   24,216       $3,582,745    $2,762,463     $   15,627     $2,778,090
                                   ==========         ==========       ==========    ==========     ==========     ==========
</TABLE>

      Intersegment interest was paid to Sterling Bank by SCMC in the amount of
      $27.7 million and $13.5 million for the years ended December 31, 2002 and
      2001, respectively. Total loans in the mortgage warehouse line of credit
      of $640.3 million and $253.7 million were eliminated in consolidation at
      December 31, 2002 and 2001, respectively.

V.    DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL STATEMENTS

      Fair values were estimated by management as of December 31, 2002 and 2001,
      and required considerable judgment. Accordingly, the estimates presented
      herein are not necessarily indicative of the amounts the Company could
      realize in a current market exchange. The use of different market
      assumptions and/or estimation methodologies may have a material effect on
      the estimated fair values presented.

      The following methods and assumptions were used to estimate the fair value
      of cash and of financial instruments for which it is practicable to
      estimate that value:

      CASH AND SHORT-TERM INVESTMENTS - For cash and short-term investments, the
      carrying amount is a reasonable estimate of fair value.

      SECURITIES - For securities held as investment, fair value equals quoted
      market prices, if available. If a quoted market price is not available,
      fair value is estimated using quoted market prices for similar securities.

      TRADING ASSETS - Securities are bought with the anticipation of sale in
      the near term are carried at fair market value which equals quoted market
      prices.

                                       59

<PAGE>

      LOANS HELD FOR SALE - For loans held for sale, fair value equals quoted
      market prices, if available. If a quoted market price is not available,
      the fair value is estimated by discounting the future cash flows using the
      current rates at which similar loans would be made to borrowers with
      similar credit ratings and for the same remaining maturities.

      LOANS HELD FOR INVESTMENT - The fair value of loans is estimated by
      discounting the future cash flows using the current rates at which similar
      loans would be made to borrowers with similar credit ratings and for the
      same remaining maturities.

      DEPOSIT LIABILITIES - The fair value of demand deposits, savings accounts
      and certain money market deposits is the amount payable on demand at the
      reporting date. The fair value of certificates of deposit is estimated
      using the rates currently offered for deposits of similar remaining
      maturities.

      OTHER BORROWED FUNDS - The carrying amounts approximate fair value because
      these borrowings reprice at market rates generally within four days.

      COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT AND FINANCIAL
      GUARANTEES WRITTEN - The fair value of commitments is estimated using the
      fees currently charged to enter into similar agreements, taking into
      account the remaining terms of the agreements and the present
      creditworthiness of the counterparties. For fixed-rate loan commitments,
      fair value also considers the difference between current levels of
      interest rates and the committed rates. The fair value of guarantees and
      letters of credit is based on fees currently charged for similar
      agreements or on the estimated cost to terminate them or otherwise settle
      the obligations with the counterparties at the reporting date.

      The estimated fair values of the Company's financial instruments are as
      follows (in thousands):

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                  -----------------------------------------------------------
                                                             2002                             2001
                                                  ---------------------------      --------------------------
                                                   CARRYING        ESTIMATED        CARRYING        ESTIMATED
                                                    AMOUNT         FAIR VALUE        AMOUNT        FAIR VALUE
                                                  ----------       ----------      ----------      ----------
<S>                                               <C>              <C>             <C>             <C>
Financial assets:
   Cash and short-term investments                $  148,302       $  148,302      $  162,722      $  162,722
   Available-for-sale securities                     251,165          251,165         251,008         251,008
   Held-to-maturity securities                        61,889           64,785          78,408          79,928
   Trading assets                                    142,803          142,803         118,511         118,511
   Loans held for sale                               701,301          701,301         261,505         261,505
   Loans held for investment                       1,943,561        1,968,485       1,666,788       1,681,843
   Less allowance for credit losses                  (27,621)         (27,621)        (22,927)        (22,927)
                                                  ----------       ----------      ----------      ----------
Total                                             $3,221,400       $3,249,220      $2,516,015      $2,532,590
                                                  ==========       ==========      ==========      ==========

Financial liabilities:
   Deposits                                       $2,673,072       $2,682,222      $2,268,980      $2,275,987
   Other borrowed funds                              509,590          509,590         180,298         180,298
                                                  ----------       ----------      ----------      ----------
Total                                             $3,182,662       $3,191,812      $2,449,278      $2,456,285
                                                  ==========       ==========      ==========      ==========

Off-balance-sheet instruments:
   Commitments to extend credit                                           ( - )                           ( - )
   Standby letters of credit                                              ( - )                           ( - )
</TABLE>

                                       60

<PAGE>

W.    SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

      The table below sets forth unaudited financial information for each
      quarter of the last two years (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                          2002                                          2001
                                       ------------------------------------------     -----------------------------------------
                                       FOURTH       THIRD      SECOND      FIRST      FOURTH      THIRD      SECOND      FIRST
                                       QUARTER     QUARTER    QUARTER     QUARTER     QUARTER    QUARTER    QUARTER     QUARTER
                                       -------     -------    --------    -------     -------    -------    --------    -------
<S>                                    <C>         <C>        <C>         <C>         <C>        <C>        <C>         <C>
Interest income                        $49,075     $46,297    $ 42,714    $40,772     $41,256    $44,780    $ 45,500    $41,063
Interest expense                         8,391       7,995       7,556      7,821       9,317     12,556      14,201     13,978
                                       -------     -------    --------    -------     -------    -------    --------    -------
    Net interest income                 40,684      38,302      35,158     32,951      31,939     32,224      31,299     27,085
Provision for credit losses              4,868       3,439       3,088      2,623       3,092      3,120       3,112      2,360
                                       -------     -------    --------    -------     -------    -------    --------    -------
Net interest income after
    provision for credit losses         35,816      34,863      32,070     30,328      28,847     29,104      28,187     24,725
Noninterest income                      29,461      27,792      23,088     16,283      19,884     14,286      19,509     12,946
Noninterest expense                     49,966      48,857      41,070     34,357      35,206     29,907      35,361     27,022
Conversion costs related
    to acquisitions                       (151)        973           -          -         957      1,194           -      1,030
                                       -------     -------    --------    -------     -------    -------    --------    -------
    INCOME BEFORE INCOME TAXES          15,462      12,825      14,088     12,254      12,568     12,289      12,335      9,619
    Provision for income taxes           5,110       4,307       4,705      3,956       4,569      4,416       4,448      2,977
                                       -------     -------    --------    -------     -------    -------    --------    -------
    NET INCOME                         $10,352     $ 8,518    $  9,383    $ 8,298     $ 7,999    $ 7,873    $  7,887    $ 6,642
                                       =======     =======    ========    =======     =======    =======    ========    =======

Earnings per share:
      Basic                            $  0.24     $  0.19    $   0.21    $  0.19     $  0.19    $  0.19    $   0.19    $  0.16
                                       =======     =======    ========    =======     =======    =======    ========    =======
      Diluted                          $  0.23     $  0.19    $   0.21    $  0.19     $  0.18    $  0.19    $   0.19    $  0.16
                                       =======     =======    ========    =======     =======    =======    ========    =======

Weighted average shares
      Basic                             43,940      43,917      43,849     43,779      42,558     42,263      42,080     41,809
                                       =======     =======    ========    =======     =======    =======    ========    =======
      Diluted                           44,687      44,872      44,797     44,658      43,346     43,224      42,886     42,711
                                       =======     =======    ========    =======     =======    =======    ========    =======
</TABLE>

      Earnings per common share are computed independently for each of the
      quarters presented and therefore may not sum to the totals for the year.

      All quarters have been restated to present the combined financial
      information of acquisitions accounted for using the pooling of interests
      method.

                                       61
<PAGE>

X.    PARENT-ONLY FINANCIAL STATEMENTS

      STERLING BANCSHARES, INC.
      (PARENT COMPANY ONLY)

      BALANCE SHEETS
      DECEMBER 31, 2002 AND 2001
      (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                                          ------------------------
                                                                            2002           2001
                                                                          ---------      ---------
<S>                                                                       <C>            <C>
ASSETS
Cash and cash equivalents                                                 $      79      $     546
Accrued interest receivable and other assets                                  5,188          3,527
Goodwill, net                                                                   527            527
Investment in bank subsidiaries                                             345,216        291,496
Investment in Sterling Bancshares Capital Trusts                              2,475          1,778
                                                                          ---------      ---------
TOTAL                                                                     $ 353,485      $ 297,874
                                                                          =========      =========

LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:

   Accrued interest payable and other liabilities                         $     253      $     348
   Notes payable                                                             21,430         20,879
   Junior subordinated debentures                                            82,475         59,278
                                                                          ---------      ---------
                Total liabilities                                           104,158         80,505

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
   Preferred stock                                                               59             39
   Common stock                                                              43,983         43,770
   Capital surplus                                                           44,633         42,526
   Retained earnings                                                        156,664        127,144
   Accumulated other comprehensive income - net
      unrealized loss on available-for-sale securities, net of tax            3,988          3,890
                                                                          ---------      ---------
                                                                            249,327        217,369
                                                                          ---------      ---------
TOTAL                                                                     $ 353,485      $ 297,874
                                                                          =========      =========
</TABLE>

                                       62

<PAGE>

      STERLING BANCSHARES, INC.
      (PARENT COMPANY ONLY)

      STATEMENTS OF INCOME
      FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
      (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                          2002              2001              2000
                                                        --------          --------          --------
<S>                                                     <C>               <C>               <C>
REVENUES:
    Dividends received from bank subsidiaries           $ 12,650          $ 26,200          $      -
    Interest income                                            -                 -                 -
    Other income                                             150                 -                 -
                                                        --------          --------          --------
      Total revenues                                      12,800            26,200                 -

EXPENSES:
    Interest expense:
      Notes payable                                          797               135                36
      Junior subordinated debentures                       5,916             4,716             2,668
    Goodwill amortization                                      -                28                28
    General and administrative                             2,809             1,171               990
                                                        --------          --------          --------
      Total expenses                                       9,522             6,050             3,722

Income (deficit) before equity in undistributed
    earnings of subsidiaries and income taxes              3,278            20,150            (3,722)

Equity in undistributed earnings of
    subsidiaries                                          30,021             8,162            29,982
                                                        --------          --------          --------

Income before income tax benefit                          33,299            28,312            26,260

Income tax benefit                                         3,252             2,089             1,280
                                                        --------          --------          --------

Net income                                              $ 36,551          $ 30,401          $ 27,540
                                                        ========          ========          ========
</TABLE>

                                       63
<PAGE>

      STERLING BANCSHARES, INC.
      (PARENT COMPANY ONLY)

      STATEMENTS OF CASH FLOWS
      FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
      (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31,
                                                                                  ----------------------------------
                                                                                    2002          2001        2000
                                                                                  ----------------------------------
<S>                                                                               <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                                                    $ 36,551     $ 30,401     $ 27,540
    Adjustments to reconcile net income to net cash
       provided by operating activities:
       Amortization of goodwill                                                          -           28           28
       Equity in undistributed earnings of subsidiary                              (30,021)      (8,162)     (29,982)

       Change in operating assets and liabilities:
          Accrued interest receivable and other assets                              (1,565)      (1,471)       2,392
          Accrued interest payable and other liabilities                              (263)          59          128
                                                                                  --------      -------     --------
                 Net cash provided by (used in) operating activities                 4,702       20,855          106

CASH FLOWS FROM INVESTING ACTIVITIES:
     Purchase of CaminoReal Bancshares, Inc.                                             -      (51,813)           -
     Cash and cash equivalents acquired with CaminoReal Bancshares, Inc.                 -          115            -
     Purchase of Community Bancshares, Inc.                                              -      (14,552)           -
     Cash and cash equivalents acquired with Community Bancshares, Inc.                  -           90            -
     Purchase of ENB Bankshares, Inc.                                              (10,386)           -            -
     Cash and cash equivalents acquired with ENB Bankshares, Inc.                       10            -            -
     Capital contribution to Sterling Bancshares Capital Trust II                        -         (889)           -
     Capital contribution to Sterling Bancshares Capital Trust III                    (967)           -            -
     Capital contribution to Sterling Bancshares Statutory Trust One                  (619)           -            -
     Redemption of investment in Sterling Bancshares Capital Trust I                   889            -            -
     Capital investment in subsidiary banks                                        (12,000)     (10,750)           -
                                                                                  --------      -------     --------
                Net cash used in investing activities                              (23,073)     (77,799)           -

CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayments of notes payable                                                        (602)      (1,600)           -
   Additions to long term debt                                                           -       20,000            -
   Proceeds from issuance of common stock                                            2,098        3,751        1,275
   Proceeds from issuance of preferred stock                                           242            -          385
   Redemption of common stock                                                            -            -            -
   Purchase of treasury stock                                                            -            -         (612)
   Payments of cash dividends                                                       (7,031)      (5,909)      (5,243)
   Proceeds from issuance of junior subordinated debentures                         52,836       29,639            -
   Redemption of junior subordinated debentures                                    (29,639)           -            -
                                                                                  --------      -------     --------
                Net cash provided by (used in) financing activities                 17,904       45,881       (4,195)
                                                                                  --------      -------     --------

NET DECREASE IN CASH                                                                  (467)     (11,063)      (4,089)

CASH AND CASH EQUIVALENTS AT
    BEGINNING OF YEAR                                                                  546       11,609       15,698
                                                                                  --------      -------     --------

CASH AND CASH EQUIVALENTS AT END OF YEAR                                          $     79     $    546     $ 11,609
                                                                                  ========     ========     ========
</TABLE>

                                       64

<PAGE>

Y.    SUBSEQUENT EVENT

      On February 28, 2003, Sterling Capital Mortgage Company (SCMC) completed
      the sale of loan servicing rights related to $728 million in loans to HSBC
      Mortgage Corporation. The sale generated a premium of $8.6 million.
      Mortgage servicing rights associated with this sale totaled $12.3 million,
      while the valuation allowance totaled $3.7 million resulting in no gain or
      loss being recorded.

Z.    RESTATEMENT

      Subsequent to the filing of Form 10-K for the year ended December 31,
      2002, the Company determined that the pending sales of its banking offices
      in Eagle Pass, Carrizo Springs, Crystal City and Pearsall and the
      financial results and condition pertaining to these offices should not
      have been reported as discontinued operations. The Company initially
      determined that the sales of the banking offices met the requirements in
      SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
      Assets," for presentation as discontinued operations. However after
      further consideration, we have determined that the proposed sales of the
      banking offices in Eagle Pass Carrizo Springs, Crystal City and Pearsall
      do not meet such requirements. Net income, basic and diluted earnings per
      share and shareholders' equity were not affected by such presentation. The
      Company determined that it was necessary to amend the December 31, 2002
      Form 10-K so that the financial results and condition pertaining to these
      four (4) banking offices are not separately reported as discontinued
      operations.

      The following table shows the effect of the restatement on the
      Consolidated Balance Sheet as previously reported:

<TABLE>
<CAPTION>
                                                              DECEMBER 31, 2002                  DECEMBER 31, 2001
                                                       ------------------------------      -----------------------------
                                                            AS          AS PREVIOUSLY          AS          AS PREVIOUSLY
                                                         RESTATED         REPORTED          RESTATED          REPORTED
                                                       -----------      -------------      ----------      -------------
<S>                                                    <C>              <C>                <C>             <C>
Cash and cash equivalents                              $   147,000       $  139,209        $  148,295        $  141,399
Loans held for investment                                1,943,561        1,910,565         1,666,788         1,636,140
Accrued interest receivable                                 15,800           15,637            11,593            11,421
Premises and equipment, net                                 56,704           54,919            54,175            52,591
Other assets                                               197,732          197,695           120,066           120,056
Assets related to discontinued operations                        -           42,772                 -            39,310

Demand deposits:
     Noninterest-bearing                                 1,016,818          991,271           797,850           776,725
     Interest-bearing                                      919,477          867,942           879,542           823,225
Certificates of deposit and other time deposits            736,777          673,689           591,588           538,651
Accrued interest payable and other liabilities              44,252           44,082            28,832            28,532
Liabilities related to discountinued operations                  -          140,340                 -           130,679
</TABLE>

                                       65

<PAGE>

      The following table shows the effect of the restatement on the
      Consolidated Income Statements as previously reported:

<TABLE>
<CAPTION>
                                                                  FOR THE YEAR ENDED DECEMBER 31,
                                                  --------------------------------------------------------------
                                                             2002                                2001
                                                  ---------------------------        ---------------------------
                                                     AS         AS PREVIOUSLY           AS         AS PREVIOUSLY
                                                  RESTATED         REPORTED          RESTATED         REPORTED
                                                  --------      -------------        --------      -------------
<S>                                               <C>           <C>                  <C>           <C>
Interest income:
    Loans, including fees                         $156,902         $154,435          $146,184         $144,003
Interest expense:
    Demand deposits and savings deposits             8,541            7,940            16,915           16,010
    Certificates and other time deposits            17,479           16,036            26,141           24,251
Noninterest income:
    Customer service fees                           16,893           15,209            14,834           13,245
    Other                                           47,346           46,916            27,585           27,311
Noninterest expense:
    Salaries and employee benefits                  90,244           88,519            69,031           67,887
    Occupancy expense                               23,844           23,455            18,284           17,976
    Technology                                       5,722            5,677             5,341            5,318
    Other                                           47,682           47,121            27,851           27,172
Income from continuing operations before
   income taxes                                     54,629           54,812            46,811           47,716
   Provision for income taxes                       18,078           18,139            16,410           16,731
Income from continuing operations                   36,551           36,673            30,401           30,985

Income (loss) from discontinued operations
   before income taxes                                   -             (183)                -             (905)
   Provision (benefit) for income taxes                  -              (61)                -             (321)
Income (loss) from discontinued operations               -             (122)                -             (584)

EARNINGS PER SHARE FROM CONTINUING OPERATIONS:
    Basic                                         $   0.83         $   0.84          $   0.72         $   0.73
                                                  ========         ========          ========         ========
    Diluted                                       $   0.82         $   0.82          $   0.71         $   0.72
                                                  ========         ========          ========         ========
</TABLE>

                                       66

<PAGE>

      The following table shows the effect of the restatement on the
      Consolidated Statements of Cash Flows as previously reported:

<TABLE>
<CAPTION>
                                                                          FOR THE YEAR ENDED          FOR THE YEAR ENDED
                                                                          DECEMBER 31, 2002            DECEMBER 31, 2001
                                                                      -------------------------    -------------------------
                                                                          AS      AS PREVIOUSLY        AS      AS PREVIOUSLY
                                                                       RESTATED      REPORTED       RESTATED      REPORTED
                                                                      ---------   -------------    ---------   -------------
<S>                                                                   <C>         <C>              <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income from continuing operations                            $  36,551     $  36,673      $  30,401     $  30,985
     Adjustments to reconcile net income to net cash provided by
        (used in) operating activities:
        Deferred income tax expense                                        (560)         (144)         9,128         9,128
        Depreciation and amortization                                    10,529        10,330          9,806         9,806
        Increase in accrued interest receivable and other assets        (79,606)      (80,004)       (36,836)      (36,836)
        Increase in accrued interest payable and other liabilities       16,029        16,159          8,686         8,686

CASH FLOWS FROM INVESTING ACTIVITIES:

     Net increase in loans                                             (225,722)     (223,374)       (99,121)      (99,121)
     Proceeds from sale of premises and equipment                         4,768         5,059          8,370         8,370
     Purchase of premises and equipment                                 (15,065)      (14,956)       (17,525)      (17,525)

CASH FLOWS FROM FINANCING ACTIVITIES:

     Net increase in deposit accounts                                   346,070       336,279        186,265       186,265
Net cash provided by (used in) discontinued operations                        -         6,077              -        (7,480)
Net increase (decrease) in cash and cash equivalents                     (1,295)       (2,190)        26,183        19,287
Cash and cash equivalents at beginning of year                          148,295       141,399        122,112       122,112
Cash and cash equivalents at end of year                              $ 147,000     $ 139,209      $ 148,295     $ 141,399
</TABLE>

                                       67
<PAGE>

                               INDEX TO EXHIBITS

2.1      Agreement and Plan of Consolidation dated as of February 17, 1998, by
         and between the Company and Humble National Bank. [Incorporated by
         reference to the Company's Report on Form 8-K filed on February 27,
         1998 (File No. 000-20750).]

2.2      Agreement and Plan of Merger dated as of June 12, 1998 among the
         Company, Sterling Bancorporation, and Hometown Bancshares, Inc., as
         amended. [Incorporated by reference to Exhibit 2.6 of the Company's
         Annual Report on Form 10-K (File No. 000-20750).]

2.3      Agreement and Plan of Merger dated as of February 24, 1999 among the
         Company, Sterling Bancorporation, and B. O. A. Bancshares, Inc., as
         amended. [Incorporated by reference to the Company's Report on Form 8-K
         filed on June 2, 1999 (File No. 000-20750).]

2.4      Agreement and Plan of Merger dated as of October 23, 2000 among the
         Company, Sterling Bancorporation, Inc. and CaminoReal Bancshares of
         Texas, Inc., as amended. [Incorporated by reference to Exhibit 2.5 of
         the Company's Annual Report on Form 10-K (File No. 000-20750).]

2.5      Agreement and Plan of Merger dated as of March 1, 2001, by and between
         Sterling Bancshares, Inc. and Lone Star Bancorporation, Inc., as
         amended. [Incorporated by reference to Exhibit 2 of the Company's
         Quarterly Report on Form 10-Q filed on May 14, 2001 (File No.
         000-20750).]

2.6      Agreement and Plan of Merger dated as of October 1, 2001 by and among
         Sterling Bancshares, Inc., Sterling Bancorporation, Inc. and Community
         Bancshares, Inc., as amended. [Incorporated by reference to Exhibit 2.7
         of the Company's Annual Report on Form 10-K (File No. 000-20750).]

2.7      Agreement and Plan of Merger Among Sterling Bancshares, Inc., Sterling
         Bancorporation, Inc. and ENB Bankshares Inc. dated as of May 22, 2002.
         [Incorporated by reference to Exhibit 2.1 of the Company's Quarterly
         Report on Form 10-Q filed on August 14, 2002 (File No. 000-20750).]

2.8      Purchase and Assumption Agreement dated July 12, 2002 between Sterling
         Bank Inc. and James Wilson as amended by First Amendment to Purchase
         and Assumption Agreement dated as of August 2, 2002. [Incorporated by
         reference to Exhibit 2.2 of the Company's Quarterly Report on Form 10-Q
         filed on August 13, 2002 (File No. 000-20750).]

2.9**    Purchase and Assumption Agreement dated as of October 29, 2002 between
         Sterling Bank Inc. and South Texas National Bank of Laredo.

3.1      Restated and Amended Articles of Incorporation of the Company, as
         amended. [Incorporated by reference to Exhibit 3.1 to the Registration
         Statement on Form S-3 (File Nos. 333-55724, 333-55724-01, and
         333-55724-02).]

3.2      Articles of Amendment to the Restated and Amended Articles of
         Incorporation of Sterling Bancshares, Inc. [Incorporated by reference
         to Exhibit 3.2 of the Company's Quarterly Report on Form 10-Q filed on
         August 13, 2002 (File No. 000-20750).]

3.3      Amended and Restated Bylaws of Sterling Bancshares, Inc. [Incorporated
         by reference to Exhibit 3.3 of the Company's Quarterly Report on Form
         10-Q filed on August 13, 2002 (File No. 000-20750).]

4.1      Preferred Securities Guarantee Agreement dated March 21, 2001.
         [Incorporated by reference to Exhibit 4.2 of the Company's Report on
         Form 8-K filed on March 21, 2001 (File No. 000-20750).]

4.2      Indenture dated March 21, 2001. [Incorporated by reference to Exhibit
         4.4 of the Company's Report on Form 8-K filed on March 21, 2001 (File
         No. 000-20750).]

4.3      First Supplemental Indenture dated March 21, 2001. [Incorporated by
         reference to Exhibit 4.5 of the Company's Report on Form 8-K filed on
         March 21, 2001 (File No. 000-20750).]
<PAGE>

4.4      9.20% Subordinated Deferrable Interest Debenture due March 21, 2031.
         [Incorporated by reference to Exhibit 4.7 of the Company's Report on
         Form 8-K filed on March 21, 2001 (File No. 000-20750).]

4.5      Indenture dated August 30, 2002. [Incorporated by reference to Exhibit
         4.4 of the Company's Report on Form 8-K filed on September 12 ,2002
         (File No. 000-20750).]

4.6      Junior Subordinated Deferrable Interest Debenture due August 30, 2032.
         [Incorporated by reference to Exhibit 4.6 of the Company's Report on
         Form 8-K filed on September 12, 2002 (File No. 000-20750).]

4.7      Guarantee Agreement dated August 30, 2002. [Incorporated by reference
         to Exhibit 4.6 of the Company's Report on Form 8-K filed on September
         12, 2002 (File No. 000-20750).]

4.8      Preferred Securities Guarantee Agreement dated September 26, 2002.
         [Incorporated by reference to Exhibit 4.2 of the Company's Report on
         Form 8-K dated September 26, 2002 (File No. 000-20750).]

4.9      Second Supplemental Indenture dated September 26, 2002. [Incorporated
         by reference to Exhibit 4.9 of the Company's Report on Form 8-K dated
         September 26, 2002 (File No. 000-20750).]

4.10     8.30% Junior Subordinated Deferrable Interest Debenture due September
         26, 2032. [Incorporated by reference to Exhibit 4.8 of the Company's
         Report on Form 8-K dated September 26, 2002 (File No. 000-20750).]

10.1***  1994 Incentive Stock Option Plan of the Company. [Incorporated by
         reference to Exhibit 10.1 of the Company's Annual Report on Form 10-K
         for the year ended December 31, 1994.]

10.2     1994 Employee Stock Purchase Plan of the Company. [Incorporated by
         reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K
         for the year ended December 31, 1994.]

10.3***  1984 Incentive Stock Option Plan of the Company. [Incorporated by
         reference to Exhibit 10.1 of the Company's Registration Statement on
         Form S-1, effective October 22, 1992 (Registration No. 33-51476).]

10.4***  1995 Non-Employee Director Stock Compensation Plan. [Incorporated by
         reference to Exhibit 4.3 of the Company's Registration Statement on
         Form S-8 (File No. 333-16719).]

10.5     Credit Agreement dated February 2, 2002 made by and between the Company
         and Wells Fargo Bank Minnesota, National Association regarding a line
         of credit in the amount of $20,000,000. [Incorporated by reference to
         the Company's Annual Report on Form 10-K for the year ended December
         31, 2001 (File No. 000-207501).]

10.6**   First Amendment to Credit Agreement dated February 2, 2003 made by and
         between the Company and Wells Fargo Bank, National Association
         regarding a line of credit in the amount of $20,000,000.

10.7***  Employment Agreement between Sterling Bancshares, Inc. and George
         Martinez executed on October 31, 2001 and effective as of January 1,
         2002. [Incorporated by reference to Exhibit 99.2 of the Company's
         Report on Form 8-K filed on October 14, 2001 (File No. 000-207500).]

10.8***  Employment Agreement between Sterling Bancshares, Inc. and J. Downey
         Bridgwater executed on October 31, 2001 and effective as of January 1,
         2002. [Incorporated by reference to Exhibit 99.3 of the Company's
         Report on Form 8-K filed on October 14, 2001 (File No. 000-207500).]

10.9***  Incentive Compensation Agreement between Sterling Bancshares, Inc. and
         Eugene S. Putnam effective as of January 1, 2002. [Incorporated by
         reference to Exhibit 10 of the Company's Quarterly Report on Form 10-Q
         filed on May 13, 2002 (File No. 000-207500).]
<PAGE>

21**     Subsidiaries of the Company.

23.1*    Consent of Deloitte & Touche LLP, Independent Auditors

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

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

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

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

*    As filed herewith.

**   As previously filed.

***  Management Compensation Agreement