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##### Index to Financial Statements





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-K







|  |  |                                                                    
|- |  | -------------------------------------------------------------------
|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES    
|  |  | EXCHANGE ACT OF 1934                                               
|  |  | For the fiscal year ended: December 31, 2007                       
|  |  | 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 ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|2550 North Loop West, Suite 600                               |  |                                    
|Houston, Texas                                                |  | 77092                              
|(Address of principal executive offices)                      |  | (Zip Code)                         

(713) 466-8300

(Registrants telephone number, including area code)

Securities registered pursuant to
Section 12(b) of the Act:



|                           |  |                                            
|-------------------------- |  | -------------------------------------------
|Common Stock, $1 par value |  | NASDAQ Global Select Market                
|(Title of each class)      |  | (Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  x    No   ̈

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes   ̈    No  x

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 is not contained herein, and will not be contained, to the best of 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the
definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x          Accelerated filer   ̈         
Non-accelerated filer   ̈          Smaller reporting company   ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈     No  x

As of June 30, 2007, the last business day of the registrants most recently completed second quarter fiscal quarter, aggregate market value of the registrants common stock
held by non-affiliates of the registrant was $807,969,050 based on the closing sale price of $11.31 on such date as reported on the National Association of Securities Dealers Automated Quotation System Global Select Market. For purposes of this
calculation, affiliates are defined as all directors and executive officers.

As of February 20, 2008, there were 73,159,069 shares of the registrants common stock, $1.00 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE



|                                                                                  |  |                                      
|--------------------------------------------------------------------------------- |  | -------------------------------------
|Document                                                                          |  | Parts Into Which Incorporated        
|Proxy Statement for the Annual Meeting of Shareholders to be held April 28, 2008. |  | Part III, Items 10, 11, 12, 13 and 14









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STERLING BANCSHARES, INC.

2007 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS



|           |  |                                                                                                              |  |   
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|PART I.    |  |                                                                                                             
|           |  |                                                                                                             
|ITEM 1.    |  | Business                                                                                                     |  | 2 
|ITEM 1A.   |  | Risk Factors                                                                                                 |  | 10
|ITEM 1B.   |  | Unresolved Staff Comments                                                                                    |  | 12
|ITEM 2.    |  | Properties                                                                                                   |  | 12
|ITEM 3.    |  | Legal Proceedings                                                                                            |  | 12
|ITEM 4.    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 12
|           | 
|PART II.   |  |                                                                                                             
|           |  |                                                                                                             
|ITEM 5.    |  | Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |  | 12
|ITEM 6.    |  | Selected Financial Data                                                                                      |  | 14
|ITEM 7.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 15
|ITEM 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 37
|ITEM 8.    |  | Financial Statements and Supplementary Data                                                                  |  | 37
|ITEM 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 37
|ITEM 9A.   |  | Controls and Procedures                                                                                      |  | 37
|ITEM 9B    |  | Other Information                                                                                            |  | 40
|           | 
|PART III.  |  |                                                                                                             
|           |  |                                                                                                             
|ITEM 10.   |  | Directors, Executive Officers and Corporate Governance                                                       |  | 40
|ITEM 11.   |  | Executive Compensation                                                                                       |  | 40
|ITEM 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 40
|ITEM 13.   |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 41
|ITEM 14.   |  | Principal Accounting Fees and Services                                                                       |  | 41
|           | 
|PART IV.   |  |                                                                                                             
|           |  |                                                                                                             
|ITEM 15.   |  | Exhibits, Financial Statement Schedules                                                                      |  | 41
|SIGNATURES |  | 48                                                                                                          



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PART I

ITEM 1. Business

The disclosures in this item are qualified by the section entitled Forward-Looking
Statements in Managements Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this report.

In this filing, we may refer to Sterling Bancshares, Inc., on a parent-only basis, as Sterling Bancshares and to Sterling Bank as the Bank. Sterling Bancshares, the Bank and other subsidiaries of both may be
collectively referred to as the Company, we, our, and us.

Overview

For more than 33 years, Sterling Bancshares, Inc. and Sterling Bank have served the banking needs of small to medium-sized businesses. We provide a broad array of
financial services to Texas businesses and consumers through 49 banking centers in the greater metropolitan areas of Houston, San Antonio and Dallas, Texas. These cities are the 4th, 7th and 9th largest, respectively, in the United States based on
population according to the U.S. Census Bureau.

Sterling Bancshares was incorporated under the laws of the State of Texas in 1980 and became the parent
bank holding company of Sterling Bank in 1981. Sterling Bank was chartered in 1974 under the laws of the State of Texas. Our principal executive offices are located at 2550 North Loop West, Suite 600, Houston, Texas, 77092 and our telephone number
is (713) 466-8300.

At December 31, 2007, we had consolidated total assets of $4.5 billion, total loans of $3.4 billion, total deposits of $3.7
billion, and shareholders equity of $480 million. On March 31, 2007 and June 28, 2007, the Company completed its acquisitions of Partners Bank of Texas (Partners Bank) and MBM Advisors, Inc. (MBM Advisors),
respectively. The results of operations for these acquisitions were included in our financial results beginning April 1, 2007 and July 1, 2007, respectively.

Business Banking Strategy.We provide a broad range of financial products and services to all our constituencies within the small to medium-sized business segments and consumers through our full service
banking centers. Each banking center is managed by experienced banking professionals. These professionals exercise substantial authority over credit and pricing decisions, subject to a concurrence process and loan committee approval for larger
credits. This approach, coupled with continuity of service by the same staff members, enables us to create lasting relationships by meeting all of the banking needs of our owner operated business customers including the business owners,
their employees and their families. This emphasis on relationship banking, together with a conservative approach to lending, are important factors in our success and growth.

We provide a wide array of consumer and commercial banking services, including demand, savings and time deposits; commercial, real estate and consumer loans; merchant credit card services; letters of credit; and cash
and asset management services. In addition, we facilitate sales of brokerage, mutual fund, alternative financing and insurance products through third-party vendors. Bank deposits are insured up to applicable limits by the Bank Insurance Fund
(BIF) of the Federal Deposit Insurance Corporation (FDIC).

We offer an extensive scope of services which include our Treasury
Management, specialized lending (including energy lending and leasing activities) and Private Client Services groups. During 2008, we will extend services to other financial institutions through our correspondent banking group. The Banks
Capital Markets group is involved in purchases of government guaranteed loans and wholesale real estate lending activities. These additional services enable the Bank to be a more comprehensive financial resource dedicated to helping owner-operated
businesses meet their financial services needs.



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Our primary lending focus is providing commercial loans and owner-occupied real estate loans to businesses with annual
sales of less than $50 million. Typically, our customers have financing requirements between $50 thousand and $5 million. The Banks credit range allows for greater diversity in the loan portfolio, less competition from larger banks, and better
pricing opportunities.

We maintain a strong community orientation by, among other things, supporting the active participation of our officers and
employees in local charitable, civic, school, religious and community development activities. Each banking center may also appoint selected customers to a business development board that assists in introducing prospective customers to us and in
developing or improving products and services to meet customer needs. Our lending and investing activities are funded primarily by core deposits. This stable source of funding comes to us by developing strong banking relationships with customers
through our broad product offering, competitive pricing, convenience and service. Approximately 30% of our total deposits are noninterest-bearing demand deposits.

Certain operational and support functions that are transparent to customers have been centralized. This has allowed us to improve consistency and cost efficiencies in the delivery of products and services by each banking center. Centralized
functions include services such as data processing, bookkeeping, accounting and finance, loan administration, loan review, compliance, treasury, risk management and internal auditing. Credit policy and administration, strategic planning, marketing
and other administrative services also are provided centrally. Our banking centers work closely with our operational and support functions to develop new products and services and to introduce enhancements to existing products and services.

Company Growth Strategy

Our growth strategy has been
concentrated on increasing our banking presence in major metropolitan areas in Texas. We are currently located in three of the ten largest metropolitan areas in the United States including Houston, San Antonio and Dallas. We have grown through a
combination of internal growth, acquisitions and the opening of new banking centers. We regularly evaluate opportunities to acquire banks and other financial services companies that complement our existing business, expand our market coverage and
enhance our product offerings.

Acquisitions have been important to our growth. As of December 31, 2007, we have completed five acquisitions since
2003. We have accomplished these acquisitions without substantially altering our balance sheet in a way that would impact the long-term value of our franchise. We continue to seek acquisitions as they become available and prove to be aligned with
our business banking philosophy.

On February 8, 2008, we completed the acquisition of ten banking centers from First Horizon National Corp.
(First Horizon). These centers are located in the Dallas and Fort Worth areas of Texas. In addition to these banking centers, we acquired three pieces of land for future banking center expansion. This transaction allows us to achieve a
critical presence in the Dallas area and expansion into the Fort Worth market.

On June 28, 2007, we completed the acquisition of MBM Advisors, an
independent advisory and pension administration/consulting firm with approximately $700 million in assets under management. MBM Advisors specializes in providing full-services in the design, administration, investment management, and communication
of retirement plans. The completion of the acquisition of MBM Advisors provides for increased opportunities to serve the owners of small and medium-sized businesses and their employees while enhancing our noninterest income.

On March 30, 2007, we completed the acquisition of Partners Bank. Partners Bank was a privately held bank with approximately $191 million in assets and four banking
centers in the Houston area. The Partners Bank acquisition enabled us to fill out our footprint in the Northeast Houston area.



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On September 29, 2006, we completed the acquisition of Kerrville, Texas-based BOTH, Inc. and its subsidiary bank,
Bank of the Hills (BOTH). BOTH had assets of approximately $328 million and five banking centers in the San Antonio/Kerrville area, which further enhanced our geographic position in this area of Texas.

On September 30, 2005, we completed the acquisition of Dallas, Texas-based Prestonwood Bancshares, Inc. (Prestonwood), and its subsidiary bank, The Oaks
Bank & Trust Company (The Oaks Bank). The Oaks Bank had assets of approximately $128 million and operated five banking centers in Dallas. This acquisition doubled our size in both assets and locations in the Dallas area.

For further information on these acquisitions, refer to Note 2, Acquisitions and Divestitures, in the Notes to Consolidated Financial Statements for more
information regarding recent acquisitions.

Competition

The financial services industry is highly competitive. There are a number of new banking competitors who have entered, or greatly expanded their presence in Texasparticularly in the Houston, San Antonio and Dallas markets in which we
operate. We experience significant competition in attracting and retaining deposits and making loans, as well as in providing other financial services in each of our markets. Product pricing, customer convenience and service capabilities, and
breadth of product lines are significant competitive factors. We also experience significant competition in attracting and retaining qualified banking professionals.

Our most direct competition for loans comes from other banks. Our most direct competition for deposits comes from other banks, savings institutions and credit unions doing business in our markets. We also experience
competition from nonbanking sources, including mutual funds, corporate and governmental debt securities and other investment alternatives offered within and outside of our primary markets. Many of our competitors are much larger in total assets and
capitalization, have greater access to capital markets and offer a broader range of financial products and services.

Supervision and Regulation

Bank holding companies and banks are extensively regulated under federal and state laws. This regulation is intended primarily for the protection of
depositors and the deposit insurance fund and not for the benefit of shareholders. A summary description of the material laws and regulations that relate to our operations is included below. These descriptions are not intended to be complete and are
qualified in their entirety by reference to such statutes and regulations.

Regulatory Oversight.Sterling Bancshares and its second tier
holding company, Sterling Bancorporation, LLC, are bank holding companies registered under the Bank Holding Company Act of 1956, as amended (BHCA), and are subject to supervision and regulation by the Federal Reserve Board. Federal laws
subject bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and policies.
In addition, Texas law authorizes the Texas Department of Banking to supervise and regulate a holding company controlling a state bank. Further, our securities are registered with the Securities and Exchange Commission (SEC) under the
Securities Act of 1933, as amended (the Securities Act) and are subject to the reporting obligations pursuant to the Securities Exchange Act of 1934, as amended (the Exchange Act). As such, we are subject to the information,
proxy solicitation, insider trading and other requirements and restrictions of the Exchange Act. We are also subject to the provisions of the Sarbanes-Oxley Act of 2002, which primarily addresses corporate governance, internal controls and
disclosure matters.

Bank Holding Company Activities. Sterling Bank is a Texas-chartered banking association and its deposits are insured, up
to applicable limits, by the BIF of the FDIC. The Bank is subject to supervision and regulation by both the Texas Department of Banking and the FDIC, and may be subject to special restrictions, supervisory



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requirements and potential enforcement actions. The Bank is not a member of the Federal Reserve System; however, the Federal Reserve Board also has
supervisory authority that indirectly affects the Bank. The Bank is a member of the Federal Home Loan Bank and, therefore, is subject to compliance with its requirements.

Under the BHCA, Sterling Bancshares activities, as well as the activities of entities which it controls or owns 5% or more of the voting securities, are limited to banking, management and control of banks,
furnishing or performing services for its subsidiaries, or any other activity which the Federal Reserve Board determines to be incidental or closely related to banking or managing or controlling banks. The BHCA provides for certain limited
exceptions to this general prohibition. The Gramm-Leach-Bliley Act amended the BHCA and granted certain expanded powers to bank holding companies as discussed below.

The Gramm-Leach-Bliley Act authorizes affiliations between banking, securities and insurance firms and authorizes bank holding companies and state banks, if permitted by state law, to engage in a variety of new
financial activities. Bank holding companies may also elect to become financial holding companies if they meet certain requirements relating to capitalization and management and have filed a declaration with the Federal Reserve Board. Among the
permitted activities by bank holding companies are securities and insurance brokerage, securities underwriting, insurance underwriting and merchant banking. The Federal Reserve Board, in consultation with the Department of Treasury, may approve
additional financial activities. We have not filed an election to be a financial holding company.

Anti-Money Laundering; USA PATRIOT Act.
Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an
independent audit function. Financial institutions are prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence and knowing your customer in their
dealings with foreign financial institutions and foreign customers. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions.
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 is intended to strengthen U.S. law enforcements and the intelligence communities ability to work cohesively to
combat terrorism on a variety of fronts. Its impact is significant and wide-ranging and has substantially increased the Companys anti-money laundering obligations. Failure of a financial institution to maintain and implement adequate programs
to combat these matters, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution.

Safety and Soundness Standards.The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) expanded the Federal Reserve Boards authority to prohibit activities of bank holding companies
and their non-banking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations. Notably, FIRREA increased the amount of civil monetary penalties that the Federal Reserve Board can assess
for certain activities conducted on a knowing and reckless basis, if those activities cause a substantial loss to a depository institution. The penalties can be as high as $1 million per day. FIRREA also expanded the scope of individuals and
entities against which such penalties may be assessed.

The federal agencies that regulate banks and savings associations jointly issued guidelines for
safe and sound banking operations as required by Section 132 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA). The guidelines identify the fundamental standards that the four agencies follow when evaluating the
operational and managerial controls at insured institutions. An institutions performance will be evaluated against these standards during the regulators periodic on-site examinations.

Dividend Restrictions. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of
income available over the past year and only if prospective earnings retention is consistent with the organizations expected future needs and financial condition. This policy provides that bank holding companies should not maintain a level of
cash dividends that undermines the bank holding



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companys ability to serve as a source of strength to its banking subsidiaries. Under Federal Reserve Board policy, a bank holding company is expected
to act as a source of financial strength to each of its banking subsidiaries and commit resources to their support. Such support may be required at times when, absent this Federal Reserve Board policy, a bank holding company may not be inclined to
provide it.

Capital Adequacy Requirements.The Federal Reserve Board monitors the capital adequacy of bank holding companies using
risk-based capital adequacy guidelines to evaluate their capital adequacy. The Bank is subject to similar requirements promulgated by the FDIC and the Texas Department of Banking. Under the guidelines, specific categories of assets and certain
off-balance sheet assets such as letters of credit are assigned different risk weights, based generally on the perceived credit risk of the asset. These risk weights are multiplied by corresponding asset balances to determine a
risk-weighted asset base. In addition, the guidelines define each of the capital components. Total capital is defined as the sum of core capital elements (Tier 1) and supplemental capital elements
(Tier 2), with Tier 2 being limited to 100% of Tier 1. For bank holding companies, Tier 1 capital includes, with certain restrictions, common shareholders equity, noncumulative perpetual
preferred stock and related surplus, a limited amount of cumulative perpetual preferred stock, and a limited amount of cumulative perpetual stock and minority interest in equity accounts of consolidated subsidiaries, less goodwill and other
intangible assets. Tier 2 capital includes, with certain limitations, perpetual preferred stock not meeting the Tier 1 definition, mandatory convertible securities, subordinated debt, and allowances for credit losses, less
certain required deductions. The guidelines require a minimum ratio of total capital-to-risk-weighted assets of 8.0% (of which at least 4.0% is required to be comprised of Tier 1 capital elements).

A minimum Tier 1 leverage ratio is used as an additional tool to evaluate the capital adequacy of banks and bank holding companies. Tier 1
leverage ratio is defined to be Tier 1 capital divided by its average total consolidated assets. Certain highly rated institutions may maintain a minimum leverage ratio of 3.0% Tier 1 capital to total average assets while
others are required to maintain a leverage ratio of 4.0% to 5.0%. The Texas Department of Bankings policy requires state chartered banks to maintain a leverage ratio of at least 6%.

Corrective Measures for Capital Deficiencies. The federal banking regulators are required to take prompt corrective action with respect to
capital-deficient institutions. Agency regulations define, for each capital category, the levels at which institutions are well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized. A well capitalized bank has a total risk-based capital ratio of 10.0% or higher; a Tier 1 risk-based capital ratio of 6.0% or higher; a leverage ratio of 5.0% or higher;
and is not subject to any written agreement, order or directive requiring it to maintain a specific capital ratio for any capital measure. An adequately capitalized bank has a total risk-based capital ratio of 8.0% or higher; a Tier 1
risk-based capital ratio of 4.0% or higher; a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated a composite 1 in its most recent examination report and is not experiencing significant growth). A bank is
undercapitalized if it fails to meet any one of the ratios required to be adequately capitalized. The Company believes that as of December 31, 2007, the Bank was well capitalized based on the guidelines and ratios for
purposes of the FDICs prompt corrective action regulations.

In addition to requiring undercapitalized institutions to submit a capital restoration
plan, agency regulations contain broad restrictions on certain activities of undercapitalized institutions including asset growth, acquisition, branch establishment and expansion into new lines of business. With certain exceptions, an insured
depository institution is prohibited from making capital distributions, including dividends, and is prohibited from paying management fees to control persons if the institution would be undercapitalized after any such distribution or payment.

As an institutions capital decreases, the FDICs enforcement powers become more severe. A significantly undercapitalized institution is subject
to mandated capital raising activities, restrictions on interest rates paid and transactions with affiliates, removal of management and other restrictions. The FDIC has only very limited discretion in dealing with a critically undercapitalized
institution and is virtually required to appoint a receiver or conservator.



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Banks with risk-based capital and leverage ratios below the required minimums may also be subject to certain
administrative actions, including the termination of deposit insurance upon notice and hearing, or a temporary suspension of insurance without a hearing in the event the institution has no tangible capital.

Imposition of Liability for Undercapitalized Subsidiaries.A bank holding company that fails to meet the applicable risk-based capital standards will be at
a disadvantage. For example, Federal Reserve Board policy discourages the payment of dividends by a bank holding company from borrowed funds as well as payments that would adversely affect capital adequacy. Failure to meet the capital guidelines may
result in the issuance of supervisory or enforcement actions by the Federal Reserve Board. FDICIA requires bank regulators to take prompt corrective action to resolve problems associated with insured depository institutions whose capital
declines below certain levels.

Acquisitions by Bank Holding Companies.The BHCA requires a bank holding company to obtain the prior approval
of the Federal Reserve Board before it acquires all or substantially all of the assets of any bank, or ownership or control of more than 5% of any class of voting shares of any bank.

Community Reinvestment Act.The Community Reinvestment Act of 1977 (CRA) and the regulations promulgated by the FDIC to implement the CRA are intended to ensure that banks meet the credit
needs of their service area, including low and moderate income communities and individuals, consistent with safe and sound banking practices. The CRA regulations also require the banking regulatory authorities to evaluate a banks record in
meeting the needs of its service area when considering applications to establish new offices or consummate any merger or acquisition transaction. Under FIRREA, the federal banking agencies are required to rate each insured institutions
performance under CRA and to make such information publicly available. In the case of an acquisition by a bank holding company, the CRA performance records of the banks involved in the transaction are reviewed as part of the processing of the
acquisition application. A CRA rating other than outstanding or satisfactory can substantially delay or block a transaction. Based upon our most recent CRA examination, the Bank has an outstanding CRA rating.

Permissible Activities for State-Chartered Institutions.The Texas Constitution provides that a Texas-chartered bank has the same rights and privileges
that are granted to national banks domiciled in Texas. The Texas Finance Code also contains provisions that expand the powers of Texas-chartered banks. Under these provisions, a Texas-chartered bank may, with limited exceptions, perform any act, own
any property, and offer any product or service that is permissible for any depository institution organized under federal law or the laws of any state, unless (i) prohibited by the FDICIA, or (ii) the Commissioner of the Texas Banking
Department finds that the activity would adversely affect the safety and soundness of the bank. However, FDICIA provides that no state bank or subsidiary thereof may engage as principal in any activity not permitted for national banks, unless the
institution complies with applicable capital requirements and the FDIC determines that the activity poses no significant risk to the Bank Insurance Fund.

Branching.Texas law provides that a Texas-chartered bank can establish a branch anywhere in Texas provided that the branch is approved in advance by the Commissioner of the Texas Department of Banking. The branch must also be
approved by the FDIC, which considers a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the community, and consistency with corporate powers.

Restrictions on Transactions with Affiliates and Insiders. Transactions between the Bank and its nonbanking affiliates, including Sterling Bancshares, are
subject to Section 23A of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by, or is under common control with the bank. In general, Section 23A imposes a limit on the amount of such
transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third parties which are collateralized by the securities or obligations of the Bank or its nonbanking affiliates.



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Affiliate transactions are also subject to Section 23B of the Federal Reserve Act which generally requires that
certain other transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at that time for comparable transactions with or involving other non-affiliated persons.

The restrictions on loans to directors, executive officers, principal shareholders and their related interests (collectively, the insiders)
contained in the Federal Reserve Act and Regulation O apply to all insured institutions and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can
be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institutions total unimpaired capital and surplus, and the FDIC may determine that a lesser amount is
appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions.

Brokered Deposit
Restrictions. FIRREA and FDICIA generally limit institutions that are not well capitalized from accepting brokered deposits. In general, undercapitalized institutions may not solicit, accept or renew brokered deposits. Adequately capitalized
institutions may not solicit, accept or renew brokered deposits unless they obtain a waiver from the FDIC. Even in that event, the institution must comply with rate limitations imposed by the Federal Deposit Insurance Act.

Restrictions on Subsidiary Banks.Dividends paid by the Bank provided substantially all of Sterling Bancshares cash flow during 2007 and will
continue to do so in the foreseeable future. Under federal law, a bank may not pay a dividend that results in an undercapitalized situation. At December 31, 2007, the aggregate amount of dividends, which legally could be paid
without prior approval of various regulatory agencies, totaled approximately $40 million.

Other requirements under Texas law affecting the operation of
subsidiary banks include requirements relating to maintenance of reserves against deposits, restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon and limitations relating to investments and
other activities.

Examinations.The FDIC periodically examines and evaluates insured banks. FDIC examinations are conducted annually. The
Texas Banking Commissioner also conducts examinations annually, unless additional examinations are deemed necessary to safeguard the interests of shareholders, depositors and creditors.

Audit Reports.The Company must submit annual audit reports prepared by an independent registered public accounting firm to federal and state regulators. In some instances, the audit report of the
institutions holding company can be used to satisfy this requirement. In addition, financial statements prepared in accordance with generally accepted accounting principles in the United States of America, managements certifications
concerning responsibility for the financial statements, internal controls and compliance with legal requirements designated by the FDIC, and an attestation by the independent registered public accounting firm regarding the statements of management
relating to the internal controls must be submitted. For institutions with total assets of more than $3 billion, an independent registered public accounting firm may be required to review quarterly financial statements. FDICIA requires that
independent audit committees be formed, consisting solely of outside directors. Committees must include members with experience in banking or financial management, must have access to outside counsel, and must not include representatives of large
customers.

Deposit Insurance Assessments.The Bank must pay assessments to the FDIC for federal deposit insurance protection. The FDIC has
adopted a risk-based assessment system as required by FDICIA. Under this system, insured depository institutions pay insurance premiums at rates based on their risk classification. Institutions assigned to higher-risk classifications pay assessments
at higher rates than institutions that pose a lower risk. An institutions risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to the regulators. In addition, the FDIC can
impose special assessments in certain instances. The FDIC may adjust the assessment rate schedule twice a year without seeking prior public comment, but only



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##### Index to Financial Statements

within a range of five cents per $100 above or below the premium schedule adopted. The FDIC can make changes in the rate schedule outside the five-cent range
above or below the current schedule only after a full rulemaking with opportunity for public comment.

Expanded Enforcement Authority.Federal banking agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines and other civil and criminal penalties, and appoint a conservator or receiver. Failure to comply with
applicable laws, regulations, and supervisory agreements could subject the Bank and its affiliates, as well as officers and directors, to administrative sanctions and potentially substantial civil penalties.

Effect on Economic Environment.The policies of regulatory authorities, including the monetary policy of the Federal Reserve Board, have a significant
effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Federal Reserve Board to affect the money supply are open market operations in U.S. government securities, changes in the discount
rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may
affect interest rates charged on loans or paid for deposits. Federal Reserve Board monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future.

Consumer Laws and Regulations. Banks are also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with
banks. Among the more prominent of such laws and regulations are the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting
Act, the Fair Housing Act and consumer privacy protection provisions of the Gramm-Leach-Bliley Act. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with consumers.
With respect to consumer privacy, the Gramm-Leach-Bliley Act generally prohibits disclosure of customer information to non-affiliated third parties unless the customer has been given the opportunity to object and has not objected to such disclosure.
Financial institutions are further required to disclose their privacy policies to customers annually.

Employees. The Company had 1,042 full
time equivalent employees as of December 31, 2007. None of our employees are represented by collective bargaining agreements and the Company considers its employee relations to be good. In 2007, Sterling was named as one of the best places to
work in Houston for the sixth consecutive year by the Houston Business Journal.

Available Information

Under the Exchange Act, Sterling Bancshares is required to file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read a
copy of any document we file with the SEC at the SECs Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information about the Public Reference Room. The SEC maintains a web
site at http://www.sec.gov that contains reports, proxy and information statements, and other information we file electronically with the SEC.

We make
available, free of charge through our web site, our reports on Forms 10-K, 10-Q and 8-K, and amendments to those reports, as soon as reasonably practicable after such reports are filed with the SEC. Additionally, we have adopted and posted on our
web site a Code of Ethics for Senior Financial Officers that applies to our principal executive officer, principal financial and accounting officer. Our web site also includes the charters for our Audit Committee and Corporate Governance and
Nominating Committee. The address for our web site is http://www.banksterling.com. The information contained on or accessible from our website does not constitute a part of this report and is not incorporated by reference herein. We will also
provide a printed copy of any of these aforementioned documents free of charge upon request.



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##### Index to Financial Statements

ITEM 1A. Risk Factors

Risks, Uncertainties and Other Factors That May Affect Our Future Results

Our profitability depends significantly on geographic economic conditions.

Our success depends primarily on the general economic conditions of the nation, the Houston metropolitan area and, to a lesser extent, that of the San Antonio and Dallas metropolitan areas. Unlike larger banks that
are more geographically diversified, we provide banking and financial services to customers primarily in the market areas in which we operate. The local economic conditions of these areas 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, Houston remains largely dependent on the energy
industry. A downturn in the energy industry and energy-related business could adversely affect our results of operations and financial condition.

We
rely on an owner-operated business market.

Our business development and marketing strategy primarily targets the banking and financial needs of
owner-operated businesses with credit needs of under $5 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
metropolitan areas in which we operate, our results of operations and financial condition will be significantly affected.

If our allowance for
credit 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 that 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. Significant additions to our allowance would materially decrease our net income.

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

Fluctuations in interest rates could reduce our profitability.

We realize income primarily from the difference between interest
earned on loans and securities 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.

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



| |  |  | inflation;
| | - |  | ----------



| |  |  | recession;
| | - |  | ----------



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##### Index to Financial Statements

| |  |  | a rise in unemployment;
| | - |  | -----------------------



| |  |  | tightening money supply;
| | - |  | ------------------------



| |  |  | international disorder; and
| | - |  | ---------------------------



| |  |  | instability in domestic and foreign financial markets.
| | - |  | ------------------------------------------------------

Our asset/liability management strategy, which is designed to address the risk from changes in market interest rates and the shape of the yield curve, may not prevent changes in interest rates from having a material adverse effect on our
results of operations 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 institutions, 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. Additionally, we face competition primarily from other banks in attracting, developing and retaining qualified banking professionals.

We may not be able to maintain our historical growth rate which may adversely impact our results of operations and financial condition.

We have initiated internal growth programs, completed various acquisitions and opened additional banking centers 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 banking centers. 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 operations 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 includes our desire 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. We may not realize expected cost savings or make revenue enhancements. 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.

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 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



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##### Index to Financial Statements

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 1B. | Unresolved Staff Comments
|-------- | -------------------------

None.



|ITEM 2. | Properties
|------- | ----------

Our principal executive offices are located at 2550
North Loop West, Suite 600, Houston, Texas, 77092, in space leased by the Company. In addition to our principal office, we operate the following locations:



|                                                 |  |       |  |        |  |      
|------------------------------------------------ |  | ----- |  | ------ |  | -----
|                                                 |  | Owned |  | Leased |  | Total
|Banking centers in the Houston metropolitan area |  | 3     |  | 28     |  | 31   
|Banking centers in the San Antonio area          |  | 3     |  | 8      |  | 11   
|Banking centers in the Dallas metropolitan area  |  |      |  | 7      |  | 7    
|Central department offices                       |  | 1     |  | 3      |  | 4    
|                                                 |  |       |  |        |  |      
|Total                                            |  | 7     |  | 46     |  | 53   
|                                                 |  |       |  |        |  |      

The Company has options to renew leases at most locations.

In 2007, we entered into a lease agreement to consolidate our central and corporate offices at one central location in Houston, Texas. This move will be completed over
the next three years and the timing of the move is aligned with the renewals and expirations of our existing leases.

ITEM 3. Legal Proceedings

From time to time, the Company is a party to various legal proceedings incident to its business.
Currently, neither Sterling Bancshares nor any of its subsidiaries are involved in any material legal proceedings.

ITEM 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to
a vote of security holders during the fourth quarter of 2007.

PART II

ITEM 5. Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Common Stock Market Prices and Dividends

Our stock trades through the NASDAQ Global Select Market System under the symbol SBIB.
In 2006, Sterling was named to the NASDAQ Global Select Market Composite Index which is a market capitalization weighted index that measures all NASDAQ domestic and international based common type stocks listed on the Global Select tier of The
NASDAQ Stock Market. The following table sets forth the high and low sales prices per share of Sterling Bancshares common stock and the dividends paid thereon for each quarter of the last two years. This information has been restated to
reflect all stock splits occurring prior to the issuance of this report.



|               |  |                       |       |     |   |          |  |   |       
|-------------- |  | --------------------- | ----- | --- | - | -------- |  | - | ------
|               |  | Sales Price Per Share |       |    
|               |  | High                  |       | Low |   | Dividend
|               |  |                       |      
|2007           |  |                       |       |     |   |          |  |   |       
|First quarter  |  | $                     | 13.25 |     | $ | 10.92    |  | $ | 0.0525
|Second quarter |  |                       | 12.60 |     |   | 10.66    |  |   | 0.0525
|Third quarter  |  |                       | 12.38 |     |   | 9.56     |  |   | 0.0525
|Fourth quarter |  |                       | 12.70 |     |   | 10.39    |  |   | 0.0525



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##### Index to Financial Statements

|               |  |                       |       |     |   |          |  |   |       
|-------------- |  | --------------------- | ----- | --- | - | -------- |  | - | ------
|               |  | Sales Price Per Share |       |    
|               |  | High                  |       | Low |   | Dividend
|               |  |                       |      
|2006           |  |                       |       |     |   |          |  |   |       
|First quarter  |  | $                     | 12.04 |     | $ | 10.12    |  | $ | 0.0467
|Second quarter |  |                       | 12.61 |     |   | 10.67    |  |   | 0.0467
|Third quarter  |  |                       | 13.93 |     |   | 11.79    |  |   | 0.0467
|Fourth quarter |  |                       | 13.84 |     |   | 11.85    |  |   | 0.0467

On January 28, 2008, the Board of Directors declared a quarterly cash dividend of $0.055 per share payable on
February 22, 2008, to shareholders of record on February 8, 2008. We intend to continue to pay a dividend at a minimum rate of $0.055 per share quarterly throughout 2008. However, there can be no assurance that we will continue to pay cash
dividends on our common stock in the future or the amount or frequency of any such dividend. The payment of future dividends is dependent on our future earnings, capital requirements and financial condition.

For information on the ability of the Bank to pay dividends and make loans to Sterling Bancshares, see Managements Discussion and Analysis of Financial
Condition and Results of OperationsFinancial ConditionInterest Rate Sensitivity and Liquidity and Note 18 to the Consolidated Financial Statements.

As of February 20, 2008, there were 73,159,061 shares of the Companys common stock outstanding held by 996 shareholders of record. The closing price per share of common stock on December 31, 2007, the
last trading day of the Companys fiscal year, was $11.16. The number of beneficial shareholders is unknown.

Recent Sales of Unregistered
Securities

The Company did not issue any shares which were exempt from the registration under the Securities Act of 1933 pursuant to
Section 3(a)(9) thereunder during 2007.

Issuer Repurchases of Equity Securities

On July 30, 2007, the Companys Board of Directors amended its existing common stock repurchase program (the Program) originally adopted by the Board of Directors on April 26, 2005. The
amendment increases by 750,000 shares the total number of shares that may be repurchased by the Company under the Program in the fiscal year 2007. The aggregate number of shares originally approved by the Board of Directors for repurchase under the
Program remains unchanged at 3,750,000 shares. The Company may repurchase shares of common stock from time to time in the open market or through privately negotiated transactions. The Company may repurchase shares from available cash or other
borrowings. During the fourth quarter of 2007, there were no purchases of the Companys equity securities registered pursuant to Section 12 of the Exchange Act.



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##### Index to Financial Statements

ITEM 6. Selected Financial Data



|                                                      |  |                                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|----------------------------------------------------- |  | --------------------------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                      |  | Year Ended December 31,                                         |          
|                                                      |  | 2007                                                            |           |   | 2006 |   |           | 2005 |  |   | 2004      |   |  | 2003 |          
|                                                      |  | (Dollars and shares in thousands, except for per share amounts) |          
|Income Statement Data:                                |  |                                                                 |           |  
|Net interest income                                   |  | $                                                               | 185,624   |   |      | $ | 171,806   |      |  | $ | 150,230   |   |  | $    | 128,972   |   |  | $ | 132,732   |  
|Provision for credit losses                           |  |                                                                 | 3,820     |   |      |   | 4,058     |      |  |   | 14,371    |   |  |      | 12,250    |   |  |   | 17,698    |  
|Noninterest income                                    |  |                                                                 | 36,220    |   |      |   | 31,217    |      |  |   | 26,959    |   |  |      | 31,025    |   |  |   | 33,187    |  
|Noninterest expense                                   |  |                                                                 | 139,354   |   |      |   | 131,186   |      |  |   | 110,646   |   |  |      | 113,300   |   |  |   | 105,830   |  
|Income from continuing operations before income taxes |  |                                                                 | 78,670    |   |      |   | 67,779    |      |  |   | 52,172    |   |  |      | 34,447    |   |  |   | 42,391    |  
|Income from continuing operations                     |  |                                                                 | 52,962    |   |      |   | 45,840    |      |  |   | 36,222    |   |  |      | 24,963    |   |  |   | 28,354    |  
|Income from discontinued operations                   |  |                                                                 |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   | 20,756    |  
|Net income                                            |  |                                                                 | 52,962    |   |      |   | 45,840    |      |  |   | 36,222    |   |  |      | 24,963    |   |  |   | 49,110    |  
|                                                      |  |                                                                 |           |   |     
|Balance Sheet Data (at period-end):                   |  |                                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total assets                                          |  | $                                                               | 4,535,909 |   |      | $ | 4,117,559 |      |  | $ | 3,726,859 |   |  | $    | 3,336,896 |   |  | $ | 3,206,880 |  
|Total loans                                           |  |                                                                 | 3,418,284 |   |      |   | 3,132,567 |      |  |   | 2,699,362 |   |  |      | 2,344,977 |   |  |   | 2,157,039 |  
|Allowance for loan losses                             |  |                                                                 | 34,446    |   |      |   | 32,027    |      |  |   | 31,230    |   |  |      | 29,406    |   |  |   | 30,722    |  
|Total securities                                      |  |                                                                 | 656,776   |   |      |   | 573,614   |      |  |   | 618,998   |   |  |      | 658,118   |   |  |   | 565,093   |  
|Trading assets                                        |  |                                                                 |          |   |      |   |          |      |  |   | 28,515    |   |  |      | 36,720    |   |  |   | 172,825   |  
|Total deposits                                        |  |                                                                 | 3,673,711 |   |      |   | 3,334,611 |      |  |   | 2,838,143 |   |  |      | 2,443,967 |   |  |   | 2,418,369 |  
|Other borrowed funds                                  |  |                                                                 | 197,147   |   |      |   | 220,675   |      |  |   | 392,850   |   |  |      | 420,575   |   |  |   | 324,160   |  
|Subordinated debt                                     |  |                                                                 | 48,694    |   |      |   | 46,135    |      |  |   | 46,238    |   |  |      | 47,162    |   |  |   | 46,533    |  
|Junior subordinated debt                              |  |                                                                 | 82,734    |   |      |   | 56,959    |      |  |   | 82,475    |   |  |      | 82,475    |   |  |   | 82,475    |  
|Shareholders equity                                  |  |                                                                 | 480,259   |   |      |   | 409,285   |      |  |   | 334,472   |   |  |      | 313,172   |   |  |   | 292,596   |  
|                                                      |  |                                                                 |           |   |     
|Common Share Data:                                    |  |                                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Earnings per share from continuing operations (1)     |  |                                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic shares                                          |  | $                                                               | 0.73      |   |      | $ | 0.67      |      |  | $ | 0.53      |   |  | $    | 0.37      |   |  | $ | 0.43      |  
|Diluted shares                                        |  |                                                                 | 0.72      |   |      |   | 0.66      |      |  |   | 0.53      |   |  |      | 0.37      |   |  |   | 0.42      |  
|Earnings per share from discontinued operations (1)   |  |                                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic shares                                          |  |                                                                 |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   | 0.31      |  
|Diluted shares                                        |  |                                                                 |          |   |      |   |          |      |  |   |          |   |  |      |          |   |  |   | 0.31      |  
|Earnings per share (1)                                |  |                                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic shares                                          |  |                                                                 | 0.73      |   |      |   | 0.67      |      |  |   | 0.53      |   |  |      | 0.37      |   |  |   | 0.74      |  
|Diluted shares                                        |  |                                                                 | 0.72      |   |      |   | 0.66      |      |  |   | 0.53      |   |  |      | 0.37      |   |  |   | 0.73      |  
|Shares used in computing earnings per common share    |  |                                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic shares                                          |  |                                                                 | 72,659    |   |      |   | 68,834    |      |  |   | 67,932    |   |  |      | 67,259    |   |  |   | 66,270    |  
|Diluted shares                                        |  |                                                                 | 73,126    |   |      |   | 69,533    |      |  |   | 68,642    |   |  |      | 67,918    |   |  |   | 66,972    |  
|End of period common sharesoutstanding                |  |                                                                 | 73,159    |   |      |   | 71,001    |      |  |   | 68,001    |   |  |      | 67,602    |   |  |   | 66,963    |  
|Book value per common share atperiod-end              |  |                                                                 |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total                                                 |  | $                                                               | 6.56      |   |      | $ | 5.76      |      |  | $ | 4.92      |   |  | $    | 4.63      |   |  | $ | 4.37      |  
|Tangible                                              |  | $                                                               | 4.04      |   |      | $ | 3.78      |      |  | $ | 3.62      |   |  | $    | 3.68      |   |  | $ | 3.39      |  
|Cash dividends paid per common share                  |  | $                                                               | 0.210     |   |      | $ | 0.186     |      |  | $ | 0.160     |   |  | $    | 0.133     |   |  | $ | 0.120     |  
|Common stock dividend payout ratio                    |  |                                                                 | 28.77     | % |      |   | 27.99     | %    |  |   | 30.00     | % |  |      | 35.91     | % |  |   | 16.19     | %



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##### Index to Financial Statements

|                                                            |  |                         |   |  |        |   |  |        |   |  |        |   |  |       |  
|----------------------------------------------------------- |  | ----------------------- | - |  | ------ | - |  | ------ | - |  | ------ | - |  | ----- | -
|                                                            |  | Year Ended December 31, |  
|                                                            |  | 2007                    |   |  | 2006   |   |  | 2005   |   |  | 2004   |   |  | 2003  |  
|Selected Performance Ratios and Other Data:                 |  |                         |   |  |        |   |  |        |   |  |        |   |  |       |  
|Return on average common equity                             |  |                         |   |  |        |   |  |        |   |  |        |   |  |       |  
|Total                                                       |  | 11.77                   | % |  | 12.66  | % |  | 11.07  | % |  | 8.23   | % |  | 18.18 | %
|Continuing                                                  |  | 11.77                   | % |  | 12.66  | % |  | 11.07  | % |  | 8.23   | % |  | 10.50 | %
|Return on average assets                                    |  |                         |   |  |        |   |  |        |   |  |        |   |  |       |  
|Total                                                       |  | 1.22                    | % |  | 1.18   | % |  | 1.02   | % |  | 0.78   | % |  | 1.48  | %
|Continuing                                                  |  | 1.22                    | % |  | 1.18   | % |  | 1.02   | % |  | 0.78   | % |  | 0.86  | %
|Tax equivalent net interest margin (2)                      |  | 4.77                    | % |  | 4.90   | % |  | 4.66   | % |  | 4.47   | % |  | 4.53  | %
|Efficiency ratio (3)                                        |  | 61.84                   | % |  | 63.79  | % |  | 61.61  | % |  | 69.72  | % |  | 65.01 | %
|Full-time equivalent employees                              |  | 1,042                   |   |  | 1,074  |   |  | 1,014  |   |  | 961    |   |  | 1,036 |  
|Number of banking centers                                   |  | 49                      |   |  | 45     |   |  | 40     |   |  | 36     |   |  | 37    |  
|                                                            |  |                         |   |  |       
|Liquidity and Capital Ratios:                               |  |                         |   |  |        |   |  |        |   |  |        |   |  |       |  
|Average loans to average deposits                           |  | 91.93                   | % |  | 95.85  | % |  | 97.67  | % |  | 89.32  | % |  | 99.91 | %
|Period-end shareholders' equity to total assets             |  | 10.59                   | % |  | 9.94   | % |  | 8.97   | % |  | 9.39   | % |  | 9.12  | %
|Average shareholders' equity to average assets              |  | 10.38                   | % |  | 9.33   | % |  | 9.19   | % |  | 9.52   | % |  | 8.16  | %
|Period-end tangible capital to total tangible assets        |  | 6.79                    | % |  | 6.74   | % |  | 6.76   | % |  | 7.61   | % |  | 7.24  | %
|Tier 1 capital to risk weighted assets                      |  | 9.05                    | % |  | 8.64   | % |  | 9.99   | % |  | 11.78  | % |  | 12.30 | %
|Total capital to risk weighted assets                       |  | 11.10                   | % |  | 10.72  | % |  | 12.36  | % |  | 14.55  | % |  | 15.40 | %
|Tier 1 leverage ratio (Tier 1 capital to average assets)    |  | 8.59                    | % |  | 8.14   | % |  | 9.11   | % |  | 10.15  | % |  | 10.38 | %
|                                                            |  |                         |   |  |       
|Asset Quality Ratios:                                       |  |                         |   |  |        |   |  |        |   |  |        |   |  |       |  
|Period-end allowance for credit losses to period-end loans  |  | 1.03                    | % |  | 1.05   | % |  | 1.20   | % |  | 1.29   | % |  | 1.42  | %
|Period-end allowance for loan losses to period-end loans    |  | 1.01                    | % |  | 1.02   | % |  | 1.16   | % |  | 1.25   | % |  | 1.42  | %
|Period-end allowance for loan losses to nonperforming loans |  | 170.41                  | % |  | 281.27 | % |  | 142.99 | % |  | 142.71 | % |  | 90.66 | %
|Nonperforming loans to period-end loans                     |  | 0.59                    | % |  | 0.36   | % |  | 0.81   | % |  | 0.88   | % |  | 1.57  | %
|Nonperforming assets to period-end assets                   |  | 0.53                    | % |  | 0.32   | % |  | 0.60   | % |  | 0.67   | % |  | 1.13  | %
|Net charge-offs to average loans                            |  | 0.09                    | % |  | 0.20   | % |  | 0.51   | % |  | 0.58   | % |  | 0.60  | %



|(1) | The calculation of diluted earnings per share excludes 550,505, 139,025, 167,663, 328,343 and 930,647 options for year 2007, 2006, 2005, 2004 and 2003 respectively, which were
antidilutive.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Taxable-equivalent basis assuming a 35% tax rate.
|--- | -------------------------------------------------

|(3) | During 2007, the efficiency ratio was changed to divide noninterest expense less acquisition costs, an employee severance payment, and Trust Preferred Securities debt issuance costs
by tax equivalent net interest income plus noninterest income less net gain (loss) on sales of investment securities and less net gain on sale/leaseback transactions. Prior period amounts have been restated to reflect the current methodology.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking
Statements

This Annual Report on Form 10-K, other periodic reports filed by us under the Exchange Act, and other written or oral statements made by or
on behalf of the Company contain certain statements relating to future events and our future results which constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward-looking statements
are typically identified by words such as expects, anticipates, intends, plans, believes, seeks, estimates, or words of similar meaning, or future or conditional
verbs such as should, could, or may.

Forward-looking statements reflect our expectation or predictions of future
conditions, events or results based on information currently available and involve risks and uncertainties that may cause actual results to differ



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##### Index to Financial Statements

materially from those in such statements. These risks and uncertainties include, but are not limited to, the risks identified in Item 1A of this report
and the following:



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



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



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



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



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



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



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

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

Overview

Managements Discussion and Analysis of Financial Condition and Results of Operations analyzes major elements of our Consolidated
Financial Statements and provides insight into important areas of managements focus. This introduction highlights selected information in this report and may not contain all of the information that is important to you. For a more complete
understanding of trends, events, commitments, liquidity, capital resources and critical accounting estimates, you should carefully read this entire report.

Our success is highly dependent on economic conditions and market interest rates. Because we operate in the Houston, San Antonio and Dallas metropolitan areas, the local economic conditions in each of these areas are particularly important.
All three of these local economies grew at a steady pace in 2007. Each economy added jobs at a faster pace than the overall U.S. economy. We are fortunate to operate in what continues to be some of the better performing markets in the country as the
overall economic outlook for Houston, San Antonio and Dallas remains favorable for 2008. We will continue to execute our strategy of serving the banking needs of small to medium-sized businesses in these metropolitan areas of Texas.

With the help of a solid Texas economy we reported record annual earnings in the 33 year history of our franchise, despite operating in a competitive market and
difficult interest rate environment. These results are reflective of the hard work of our bankers, our focus on our market segment and our metropolitan markets in Texas. We were able to improve our efficiency ratio from 63.8% in 2006 to 61.8% in
2007 as part of a concentrated effort to become a more efficient institution and establish a sustainable cost discipline throughout the entire franchise. In addition, our noninterest income increased $5.0 million over the past year primarily due to
the completion of three acquisitions since September 2006.

In 2007, our earnings per share increased 9% compared to 2006. Additionally, during 2007 our
overall average earning assets grew by 11%, average total loans grew by 13% and average deposits grew by 18%.



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##### Index to Financial Statements

We continue to look for fairly-priced strategic acquisitions in Houston, San Antonio and Dallas, Texas. On
February 8, 2008, we completed the acquisition of ten branches located in the Dallas and Fort Worth areas from First Horizon National Corp. (First Horizon). In addition to these ten bank branches, we also acquired land for possible
future Sterling banking centers in Lewisville, Arlington and Fort Worth, Texas. This transaction allows us to achieve a critical presence in Dallas and an entry into the growing Fort Worth market.

Critical Accounting Policies

An understanding of our accounting
policies is important to an understanding of our reported results. Accounting policies are described in detail in Note 1 to the Consolidated Financial Statements in this Annual Report of Form 10-K. Certain of our accounting policies are
considered to be critical because they involve subjective judgment, estimation by management or are particularly complex in their nature.

Allowance
for credit losses. The allowance for credit losses is a valuation allowance for probable losses incurred on loans and binding commitments. 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 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 our control. Please refer to the
subsequent discussion of Allowance for Credit Losses below as well as in Note 1 to the Consolidated Financial Statements for additional insight into managements approach and methodology in estimating the allowance for credit
losses.

Goodwill and Other Intangibles.Goodwill and intangible assets that have indefinite useful lives are subject to an annual evaluation
of whether any impairment has occurred. If any such impairment is determined to have occurred, a write-down would be recorded. Intangible assets consist primarily of core deposits and customer relationships. Intangible assets with definite useful
lives are amortized on an accelerated basis over the years expected to be benefited, which we believe is approximately 10 years. Based on our annual goodwill impairment test, management does not believe any of our goodwill is impaired as of
December 31, 2007. While we believe no impairment existed at December 31, 2007 under accounting standards applicable at that date, different conditions or assumptions, or changes in cash flows or profitability, if significantly
negative or unfavorable, could have a material adverse effect on the outcome of our impairment evaluation and financial condition or future results of operations.

Derivatives.We may designate a derivative as either an accounting hedge of the fair value of a recognized fixed rate asset or an unrecognized firm commitment (fair value hedge) or an accounting hedge of a
forecasted transaction or of the variability of future cash flows of a floating rate asset or liability (cash flow hedge). All derivatives are recorded as other assets or other liabilities on the balance sheet at their respective fair
values. To the extent a hedge is considered effective, changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge are recorded in other comprehensive income, net of income taxes. For all hedge relationships,
ineffectiveness resulting from differences between the changes in fair value or cash flows of the hedged item and changes in fair value of the derivative are recognized as other income in the results of operations.

Stock-based Compensation.On January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards (SFAS)
No. 123R, Share-Based Payment (Revised 2004). SFAS No. 123R applies to



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##### Index to Financial Statements

new awards and to awards modified, repurchased, or cancelled after January 1, 2006. SFAS No. 123R eliminated the ability to account for stock-based
compensation using the intrinsic value-based method of accounting, and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the date of the grant. The grant date fair value of
options is determined using option pricing models based on subjective assumptions which materially affect the fair value estimate. Compensation expense for restricted stock awards is based on the market price of the stock on the date of grant and is
recognized ratably over the vesting period of the award. Please refer to Note 1 to the Consolidated Financial Statements for further information. Disclosures of stock-based compensation are also included in Note 13 to the Consolidated Financial
Statements.

Results of Operations

Performance
Summary.Net income for the year ended December 31, 2007 was $53.0 million, or $0.72 per diluted share, compared with $45.8 million, or $0.66 per diluted share, earned for 2006 and $36.2 million, or $0.53 per diluted share, earned for
2005.

Net income for 2007 increased $7.1 million or 15.5% compared to 2006. This increase was due primarily to an increase in net interest income of $13.8
million, an increase in noninterest income of $5.0 million partially offset by an increase in noninterest expense of $8.2 million. Net income for 2006 increased $9.6 million or 26.6% compared to 2005. This increase was due primarily to an increase
in net interest income of $21.6 million and a decrease in the provision for credit losses of $10.3 million partially offset by an increase in noninterest expense of $20.5 million.

A banking institutions return on average assets and return on average common equity are two commonly used industry measures of performance. Return on average assets (ROA) measures net income in
relation to average total assets and is an indicator of a company's ability to employ its resources profitably. For 2007, our ROA (from continuing operations) was 1.22%, as compared to 1.18% and 1.02% for 2006 and 2005, respectively.

Return on average common equity (ROE) measures net income in relation to average common equity and is an indicator of a companys return to its owners.
For 2007, our ROE (from continuing operations) was 11.77%, as compared to 12.66% and 11.07% for 2006 and 2005, respectively.

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

The Federal Reserve Board significantly influences market interest rates, including rates offered for loans and deposits by many financial institutions. Generally, when the Federal Reserve Board changes the target
overnight interest rate charged by banks, the market responds with a similar change in the prime lending rate. Our loan portfolio is impacted significantly by changes in short-term interest rates. Beginning in June 2004, the Federal Open Market
Committee (FOMC) increased the Federal Funds Target Rate by a total of 425 basis points to 5.25% at June 30, 2006. The Federal Funds Target Rate remained at 5.25% until September 2007. This increase in interest rates had a positive
impact on our net interest income and net interest margin through mid-2006.

Beginning in September 2007, the federal funds rate decreased 100 basis points
to 4.25% at December 31, 2007. Due to the timing of the rate change at the end of the year, the decrease in rates did not have a significant impact on the companys net interest margin and net interest income during 2007.

Tax equivalent net interest income increased $14.1 million or 8.1% for 2007 compared to 2006, and $21.5 million or 14.2% for 2006 compared to 2005. Our tax equivalent
net interest margin was 4.77% for 2007 compared to 4.90% for 2006 and 4.66% for 2005.



18



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##### Index to Financial Statements

Total tax equivalent interest income increased $33.8 million or 13.2% for 2007 compared to 2006, and $50.0 million or
24.3% for 2006 compared to 2005 due to an increase in both the growth and yield earned on the loan portfolio. Average total loans for 2007 increased $387 million or 13.3% compared to 2006, and $354 million or 13.9% for 2006 compared to 2005. The
size of the loan portfolio as a percentage of average interest-earning assets increased from 78% in 2005 to 82% in 2006 and 84% in 2007. The tax equivalent yield earned on average total loans increased eight basis points and 94 basis points for the
years ended 2007 and 2006, respectively. This increase in loans resulted in an increase in tax equivalent interest income by $33.0 million for 2007 compared to 2006. Tax-equivalent interest income on loans increased $51.5 million for 2006 compared
to 2005 due to a combination of higher average loans and increases in market interest rates through 2006.

On average, the securities portfolio (including
trading assets) was higher by $4.3 million for 2007 compared to 2006. The increase in average securities combined with a seven basis point increase in tax equivalent yield earned on securities for the year ended 2007 resulted in an increase in tax
equivalent interest income on securities of $565 thousand compared to the year ended 2006. On average, the securities portfolio (including trading assets) decreased $69.8 million for 2006 compared to 2005. This decrease in average securities
partially offset by a 24 basis point increase in tax equivalent yield earned on securities for the year ended 2006 resulted in a decrease in tax equivalent interest income on securities of $1.6 million compared to the year ended 2005.

Total interest expense increased $19.7 million and $28.6 million for the years ended 2007 and 2006, respectively. Average interest-bearing liabilities for 2007 increased
$286 million or 11.6% compared to 2006 and $200 million or 8.8% compared to 2005. The average rate paid on interest-bearing liabilities increased 37 basis points during 2007 compared to 2006 and 96 basis points during 2006 compared to 2005.

The increase in interest-bearing liabilities during 2007 was primarily due to an increase in average interest-bearing deposits of $483 million for the
year ended 2007 compared to 2006 and $341 million for the year ended 2006 compared to 2005. The average rate paid on all interest-bearing deposits increased 64 basis points for the year ended 2007 as compared to 2006 and 105 basis points for the
year ended 2006 compared to 2005 due to a change in the deposit mix and an increase in rate paid on deposit products. During 2006 and 2007, there was a shift from noninterest-bearing demand deposits to higher paying money market accounts and
certificates of deposit due to a combination of increased competition and the acquisition of BOTH in late 2006. On average, noninterest-bearing demand deposits were 30%, 34% and 36% of total average deposits for the years ended 2007, 2006 and 2005,
respectively. The increase in average deposit balances and interest rates paid resulted in additional interest expense of $29.3 million for the year ended 2007 compared to 2006 and $26.9 million for the year ended 2006 compared to 2005.

The increase in average deposits contributed to a decrease in average other borrowings of $211 million for the year ended 2007 compared to 2006 and $122 million for
2006 compared to 2005. This decrease in average other borrowings contributed to a decrease in interest expense on other borrowings of $10.4 million for 2007 as compared to 2006. The benefit of the decrease in other borrowings was partially offset by
an increase in rate paid of 8 basis points. Interest expense increased $2.2 million for 2006 compared to 2005 due to an increase in rate paid of 176 basis points.

Average junior subordinated debt increased $12.6 million for the year ended 2007 compared to 2006. During the first quarter of 2007, we issued junior subordinated debt of $25.7 million in aggregate principal with an interest rate of 6.95%.
Average junior subordinated debt decreased $18.3 million for the year ended 2006 compared to 2005. This decrease was due to the prepayment of $29.6 million of junior subordinated debentures with an interest rate of 9.20%. Overall, these changes
resulted in a decrease in rate paid of 56 basis points for the year ended 2007 compared to 2006.



19



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##### Table of Contents

##### Index to Financial Statements

Certain average balances, together with the total dollar amounts of interest income and expense and the average tax
equivalent interest yield/rates are included below (in thousands).



|                                                    |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|--------------------------------------------------- |  | ----------------------- | --------- | - | -------- | - | ----------------- | ---- | ---- | -------------- |  | - | --------- | - | ----------------- | - | ------- | -------------- | ---- | - | -------- | - | ----------------- | - |  | - | ------- |  | ----- | -
|                                                    |  | Year Ended December 31, |          
|                                                    |  | 2007                    |           |   | 2006     |   |                   | 2005 |     
|                                                    |  | AverageBalance          |           |   | Interest |   | AverageYield/Rate |      |      | AverageBalance |  |   | Interest  |   | AverageYield/Rate |   |         | AverageBalance |      |   | Interest |   | AverageYield/Rate |  
|Interest-Earning Assets:                            |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Loans held for sale (1)                             |  | $                       | 62,232    |   |          | $ | 4,982             |      | 8.01 | %              |  | $ | 30,400    |   |                   | $ | 2,427   |                | 7.98 | % |          | $ | 10,130            |   |  | $ | 730     |  | 7.21  | %
|Loans held for investment (1):                      |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Taxable                                             |  |                         | 3,221,523 |   |          |   | 254,931           |      | 7.91 | %              |  |   | 2,867,308 |   |                   |   | 224,490 |                | 7.83 | % |          |   | 2,533,799         |   |  |   | 174,612 |  | 6.89  | %
|Non-taxable (2)                                     |  |                         | 3,344     |   |          |   | 265               |      | 7.92 | %              |  |   | 2,734     |   |                   |   | 237     |                | 8.66 | % |          |   | 2,530             |   |  |   | 263     |  | 10.40 | %
|Securities:                                         |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Taxable                                             |  |                         | 523,589   |   |          |   | 23,849            |      | 4.55 | %              |  |   | 535,589   |   |                   |   | 23,886  |                | 4.46 | % |          |   | 595,425           |   |  |   | 24,936  |  | 4.19  | %
|Non-taxable (2)                                     |  |                         | 92,928    |   |          |   | 4,699             |      | 5.06 | %              |  |   | 69,175    |   |                   |   | 3,574   |                | 5.17 | % |          |   | 62,892            |   |  |   | 3,462   |  | 5.50  | %
|Trading assets                                      |  |                         | 4,396     |   |          |   | 173               |      | 3.93 | %              |  |   | 11,881    |   |                   |   | 696     |                | 5.85 | % |          |   | 28,114            |   |  |   | 1,318   |  | 4.69  | %
|Federal funds sold                                  |  |                         | 13,061    |   |          |   | 597               |      | 4.58 | %              |  |   | 5,371     |   |                   |   | 261     |                | 4.87 | % |          |   | 9,460             |   |  |   | 293     |  | 3.09  | %
|Deposits in financial institutions                  |  |                         | 734       |   |          |   | 35                |      | 4.78 | %              |  |   | 3,970     |   |                   |   | 183     |                | 4.61 | % |          |   | 2,596             |   |  |   | 93      |  | 3.58  | %
|                                                    |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Total interest-earning assets                       |  |                         | 3,921,807 |   |          |   | 289,531           |      | 7.38 | %              |  |   | 3,526,428 |   |                   |   | 255,754 |                | 7.25 | % |          |   | 3,244,946         |   |  |   | 205,707 |  | 6.34  | %
|                                                    |  |                         |           |   |          |   |                   |      |     
|Noninterest-earning assets:                         |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Cash and due from banks                             |  |                         | 108,603   |   |          |   |                   |      |      |                |  |   | 105,681   |   |                   |   |         |                |      |   |          |   | 99,088            |   |  |   |         |  |       |  
|Premises and equipment, net                         |  |                         | 25,768    |   |          |   |                   |      |      |                |  |   | 39,276    |   |                   |   |         |                |      |   |          |   | 39,020            |   |  |   |         |  |       |  
|Other assets                                        |  |                         | 311,413   |   |          |   |                   |      |      |                |  |   | 240,678   |   |                   |   |         |                |      |   |          |   | 207,678           |   |  |   |         |  |       |  
|Allowance for loan losses                           |  |                         | (33,306   | ) |          |   |                   |      |      |                |  |   | (32,314   | ) |                   |   |         |                |      |   |          |   | (31,467           | ) |  |   |         |  |       |  
|                                                    |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Total noninterest-earning assets                    |  |                         | 412,478   |   |          |   |                   |      |      |                |  |   | 353,321   |   |                   |   |         |                |      |   |          |   | 314,319           |   |  |   |         |  |       |  
|                                                    |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Total assets                                        |  | $                       | 4,334,285 |   |          |   |                   |      |      |                |  | $ | 3,879,749 |   |                   |   |         |                |      |   |          | $ | 3,559,265         |   |  |   |         |  |       |  
|                                                    |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|                                                    |  |                         |           |   |          |   |                   |      |     
|Interest-bearing liabilities:                       |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Deposits:                                           |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Demand and savings                                  |  | $                       | 1,304,168 |   |          | $ | 29,217            |      | 2.24 | %              |  | $ | 1,093,652 |   |                   | $ | 17,934  |                | 1.64 | % |          | $ | 978,218           |   |  | $ | 8,525   |  | 0.87  | %
|Certificates and other time                         |  |                         | 1,191,393 |   |          |   | 55,691            |      | 4.67 | %              |  |   | 918,432   |   |                   |   | 37,671  |                | 4.10 | % |          |   | 692,724           |   |  |   | 20,148  |  | 2.91  | %
|Other borrowed funds                                |  |                         | 134,349   |   |          |   | 6,829             |      | 5.08 | %              |  |   | 345,138   |   |                   |   | 17,273  |                | 5.00 | % |          |   | 466,778           |   |  |   | 15,102  |  | 3.24  | %
|Subordinated debt                                   |  |                         | 46,521    |   |          |   | 4,649             |      | 9.99 | %              |  |   | 45,522    |   |                   |   | 4,476   |                | 9.83 | % |          |   | 46,897            |   |  |   | 3,665   |  | 7.82  | %
|Junior subordinated debt                            |  |                         | 76,802    |   |          |   | 6,239             |      | 8.12 | %              |  |   | 64,210    |   |                   |   | 5,571   |                | 8.68 | % |          |   | 82,475            |   |  |   | 6,933   |  | 8.41  | %
|                                                    |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Total interest-bearing liabilities                  |  |                         | 2,753,233 |   |          |   | 102,625           |      | 3.73 | %              |  |   | 2,466,954 |   |                   |   | 82,925  |                | 3.36 | % |          |   | 2,267,092         |   |  |   | 54,373  |  | 2.40  | %
|                                                    |  |                         |           |   |          |   |                   |      |     
|Noninterest-bearing sources:                        |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Demand deposits                                     |  |                         | 1,080,099 |   |          |   |                   |      |      |                |  |   | 1,013,788 |   |                   |   |         |                |      |   |          |   | 936,215           |   |  |   |         |  |       |  
|Other liabilities                                   |  |                         | 50,975    |   |          |   |                   |      |      |                |  |   | 36,974    |   |                   |   |         |                |      |   |          |   | 28,836            |   |  |   |         |  |       |  
|                                                    |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Total noninterest-bearing liabilities               |  |                         | 1,131,074 |   |          |   |                   |      |      |                |  |   | 1,050,762 |   |                   |   |         |                |      |   |          |   | 965,051           |   |  |   |         |  |       |  
|Shareholders equity                                |  |                         | 449,978   |   |          |   |                   |      |      |                |  |   | 362,033   |   |                   |   |         |                |      |   |          |   | 327,122           |   |  |   |         |  |       |  
|                                                    |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Total liabilities and shareholders equity          |  | $                       | 4,334,285 |   |          |   |                   |      |      |                |  | $ | 3,879,749 |   |                   |   |         |                |      |   |          | $ | 3,559,265         |   |  |   |         |  |       |  
|                                                    |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Tax equivalent net interest income & margin (2) (3) |  |                         |           |   |          |   | 186,906           |      | 4.77 | %              |  |   |           |   |                   |   | 172,829 |                | 4.90 | % |          |   |                   |   |  |   | 151,334 |  | 4.66  | %
|                                                    |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|                                                    |  |                         |           |   |          |   |                   |      |     
|Tax Equivalent Adjustment:                          |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Loans                                               |  |                         |           |   |          |   | 77                |      |      |                |  |   |           |   |                   |   | 71      |                |      |   |          |   |                   |   |  |   | 84      |  |       |  
|Securities                                          |  |                         |           |   |          |   | 1,205             |      |      |                |  |   |           |   |                   |   | 952     |                |      |   |          |   |                   |   |  |   | 1,020   |  |       |  
|                                                    |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Total tax equivalent adjustment                     |  |                         |           |   |          |   | 1,282             |      |      |                |  |   |           |   |                   |   | 1,023   |                |      |   |          |   |                   |   |  |   | 1,104   |  |       |  
|                                                    |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  
|Net Interest Income                                 |  |                         |           |   |          | $ | 185,624           |      |      |                |  |   |           |   |                   | $ | 171,806 |                |      |   |          |   |                   |   |  | $ | 150,230 |  |       |  
|                                                    |  |                         |           |   |          |   |                   |      |      |                |  |   |           |   |                   |   |         |                |      |   |          |   |                   |   |  |   |         |  |       |  



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

|(2) | Taxable-equivalent adjustments are the result of increasing income from nontaxable loans and securities by an amount equal to the taxes that would be paid if the income were fully
taxable based on a 35% federal tax rate, thus making tax-exempt yields comparable to taxable asset yields.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The net interest margin is equal to net interest income divided by average total interest-earning assets.
|--- | ---------------------------------------------------------------------------------------------------------



20



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##### Table of Contents

##### Index to Financial Statements

The following table shows the portions of the net change in tax equivalent interest income and expense due to changes in
volume or rate. The changes in tax equivalent interest income due to both rate and volume in the analysis have been allocated proportionately to the volume or rate changes (in thousands):



|                                       |  |                                                    |         |   |                                                    |   |         |       |  |   |         |   |  |      |        |   |       |   |        |   |  |   |        |  
|-------------------------------------- |  | -------------------------------------------------- | ------- | - | -------------------------------------------------- | - | ------- | ----- |  | - | ------- | - |  | ---- | ------ | - | ----- | - | ------ | - |  | - | ------ | -
|                                       |  | 2007 vs. 2006Increase (Decrease)Due to Changes in: |         |   | 2006 vs. 2005Increase (Decrease)Due to Changes in: |  
|                                       |  | Volume                                             |         |   | Rate                                               |   |         | Total |  |   | Volume  |   |  | Rate |        |   | Total |  
|Interest-earning assets:               |  |                                                    |         |   |                                                    |   |         |       |  |   |         |   |  |      |        |   |       |   |        |   |  |   |        |  
|Loans held for sale                    |  | $                                                  | 2,548   |   |                                                    | $ | 7       |       |  | $ | 2,555   |   |  | $    | 1,610  |   |       | $ | 87     |   |  | $ | 1,697  |  
|Loans held for investment:             |  |                                                    |         |   |                                                    |   |         |       |  |   |         |   |  |      |        |   |       |   |        |   |  |   |        |  
|Taxable                                |  |                                                    | 28,007  |   |                                                    |   | 2,434   |       |  |   | 30,441  |   |  |      | 24,521 |   |       |   | 25,357 |   |  |   | 49,878 |  
|Non-taxable (1)                        |  |                                                    | 44      |   |                                                    |   | (16     | )     |  |   | 28      |   |  |      | 27     |   |       |   | (53    | ) |  |   | (26    | )
|Securities:                            |  |                                                    |         |   |                                                    |   |         |       |  |   |         |   |  |      |        |   |       |   |        |   |  |   |        |  
|Taxable                                |  |                                                    | (540    | ) |                                                    |   | 503     |       |  |   | (37     | ) |  |      | (2,606 | ) |       |   | 1,556  |   |  |   | (1,050 | )
|Non-taxable (1)                        |  |                                                    | 1,152   |   |                                                    |   | (27     | )     |  |   | 1,125   |   |  |      | 172    |   |       |   | (60    | ) |  |   | 112    |  
|Trading assets                         |  |                                                    | (344    | ) |                                                    |   | (179    | )     |  |   | (523    | ) |  |      | (893   | ) |       |   | 271    |   |  |   | (622   | )
|Federal funds sold                     |  |                                                    | 353     |   |                                                    |   | (17     | )     |  |   | 336     |   |  |      | (159   | ) |       |   | 127    |   |  |   | (32    | )
|Deposits in financial institutions     |  |                                                    | (154    | ) |                                                    |   | 6       |       |  |   | (148    | ) |  |      | 58     |   |       |   | 32     |   |  |   | 90     |  
|                                       |  |                                                    |         |   |                                                    |   |         |       |  |   |         |   |  |      |        |   |       |   |        |   |  |   |        |  
|Total tax equivalent interest income   |  |                                                    | 31,066  |   |                                                    |   | 2,711   |       |  |   | 33,777  |   |  |      | 22,730 |   |       |   | 27,317 |   |  |   | 50,047 |  
|                                       |  |                                                    |         |   |                                                    |   |         |       |  |   |         |   |  |      |        |   |       |   |        |   |  |   |        |  
|                                       |  |                                                    |         |   |                                                    |  
|Interest-bearing liabilities:          |  |                                                    |         |   |                                                    |   |         |       |  |   |         |   |  |      |        |   |       |   |        |   |  |   |        |  
|Deposits:                              |  |                                                    |         |   |                                                    |   |         |       |  |   |         |   |  |      |        |   |       |   |        |   |  |   |        |  
|Demand and savings                     |  |                                                    | 3,888   |   |                                                    |   | 7,395   |       |  |   | 11,283  |   |  |      | 1,111  |   |       |   | 8,298  |   |  |   | 9,409  |  
|Certificates and other time            |  |                                                    | 12,316  |   |                                                    |   | 5,704   |       |  |   | 18,020  |   |  |      | 7,903  |   |       |   | 9,620  |   |  |   | 17,523 |  
|Short-term borrowings                  |  |                                                    | (10,713 | ) |                                                    |   | 269     |       |  |   | (10,444 | ) |  |      | (4,630 | ) |       |   | 6,801  |   |  |   | 2,171  |  
|Subordinated debt                      |  |                                                    | 99      |   |                                                    |   | 74      |       |  |   | 173     |   |  |      | (110   | ) |       |   | 921    |   |  |   | 811    |  
|Junior subordinated debt               |  |                                                    | 1,041   |   |                                                    |   | (373    | )     |  |   | 668     |   |  |      | (1,579 | ) |       |   | 217    |   |  |   | (1,362 | )
|                                       |  |                                                    |         |   |                                                    |   |         |       |  |   |         |   |  |      |        |   |       |   |        |   |  |   |        |  
|Total interest expense                 |  |                                                    | 6,631   |   |                                                    |   | 13,069  |       |  |   | 19,700  |   |  |      | 2,695  |   |       |   | 25,857 |   |  |   | 28,552 |  
|                                       |  |                                                    |         |   |                                                    |   |         |       |  |   |         |   |  |      |        |   |       |   |        |   |  |   |        |  
|Tax equivalent net interest income (1) |  | $                                                  | 24,435  |   |                                                    | $ | (10,358 | )     |  | $ | 14,077  |   |  | $    | 20,035 |   |       | $ | 1,460  |   |  | $ | 21,495 |  
|                                       |  |                                                    |         |   |                                                    |   |         |       |  |   |         |   |  |      |        |   |       |   |        |   |  |   |        |  



|(1) | Taxable-equivalent basis assuming a 35% tax rate.
|--- | -------------------------------------------------

Noninterest Income.Noninterest income consisted of the following (in thousands):



|                                       |  |      |        |      |   |        |      |  |   |       
|-------------------------------------- |  | ---- | ------ | ---- | - | ------ | ---- |  | - | ------
|                                       |  | 2007 |        | 2006 |   |        | 2005
|Customer service fees                  |  | $    | 14,327 |      | $ | 12,850 |      |  | $ | 12,137
|Net gain (loss) on trading assets      |  |      | 2      |      |   | (302   | )    |  |   | 147   
|Net gain (loss) on securities          |  |      | 3      |      |   | (358   | )    |  |   | 60    
|Net gain on the sale of loans          |  |      | 1,991  |      |   | 1,326  |      |  |   | 1,455 
|Bank-owned life insurance              |  |      | 3,738  |      |   | 2,938  |      |  |   | 3,018 
|Wealth and asset management fees       |  |      | 5,662  |      |   | 2,899  |      |  |   | 1,938 
|Debit card income                      |  |      | 2,330  |      |   | 1,988  |      |  |   | 1,727 
|Federal Home Loan Bank stock dividends |  |      | 604    |      |   | 941    |      |  |   | 981   
|Other                                  |  |      | 7,563  |      |   | 8,935  |      |  |   | 5,496 
|                                       |  |      |        |      |   |        |      |  |   |       
|                                       |  | $    | 36,220 |      | $ | 31,217 |      |  | $ | 26,959
|                                       |  |      |        |      |   |        |      |  |   |       

Customer service fees increased $1.5 million for 2007 compared to 2006 and $713 thousand for 2006 compared to
2005. These increases were due to the addition of new deposit products and changes in the routines of applying service charges. Additionally, we completed three acquisitions since the third quarter of 2006 which resulted in a $1.2 million positive
impact to customer service fees for 2007.



21



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##### Table of Contents

##### Index to Financial Statements

Net gains and losses on trading assets were attributable to the market conditions for these types of assets. Beginning in
2004, we significantly reduced our trading assets portfolio. We may potentially reinvest in these assets depending on future market conditions. Trading assets are carried at fair market value in our consolidated balance sheets.

Net losses on securities for 2006 were due, in part, to realized losses of $562 thousand recorded on certain interest-only securities. These securities are tied to an
underlying government guaranteed loan and are subject to prepayment and interest rate fluctuations. These securities had been in an unrealized loss position since the fourth quarter of 2005. Given the prepayment factors for the underlying loan at
December 31, 2006 and managements inability to determine when a full recovery of the value may occur, management considered these securities to be other than temporarily impaired. These losses were offset by a $204 thousand realized gain
on investments which were sold subsequent to the acquisition of BOTH and as part of our routine portfolio management.

Net gains on the sale of loans
increased $665 thousand for 2007 compared to 2006. This increase for 2007 as compared to 2006 was due primarily to an increased volume of loan sales in our Capital Markets group.

Wealth and asset management fees increased $2.8 million for 2007 compared to 2006. This increase was due primarily to the addition of MBM Advisors which contributed $2.9 million since the March 2007 acquisition date.
MBM Advisors is an investment advisory and pension administration/consulting firm with approximately $700 million in assets under management providing full-services in the design, administration, investment management, and communication of
retirement plans with offices in both Houston and Dallas, Texas. Our wealth and asset management group provides customized solutions for high net worth customers by integrating financial services with traditional banking products and services such
as private banking, money management, full-service brokerage, financial planning, personal and institutional trust and retirement services, as well as insurance and risk management services.

Other noninterest income decreased $1.4 million for 2007 compared to 2006. This decrease was primarily due to the completion of three sale/leaseback transactions in 2006
resulting in total net pre-tax gains of $1.8 million.

Other noninterest income increased $3.4 million for 2006 compared to 2005. This increase was due, in
part, to an increase in commission income and other lending fees of $988 thousand. Additionally, during 2006, we completed three separate sale/leaseback transactions resulting in net pre-tax gains of $1.8 million. These transactions included the
sale of a multi-tenant office building which resulted in a gain of $1.1 million and the sale of a banking center location in San Antonio which resulted in a gain of $1.0 million. The third sale/leaseback transaction included the sale of 16
bank-owned locations for a total sales price of $28.3 million resulting in a deferred gain of $9.3 million. This gain is being recognized into income over varying lease terms of up to 20 years. As part of this transaction, we recorded a net
loss of $281 thousand which reduced other noninterest income during 2006.

Noninterest Expense.The
following table shows the detail of noninterest expense (in thousands):



|                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                          |  | 2007 |         |   | 2006 |   |         | 2005 | 
|Salaries and employee benefits                                            |  | $    | 81,039  |   |      | $ | 76,046  |      |  | $ | 61,229  |  
|Occupancy                                                                 |  |      | 18,366  |   |      |   | 16,075  |      |  |   | 15,556  |  
|Technology                                                                |  |      | 8,843   |   |      |   | 6,882   |      |  |   | 5,524   |  
|Professional fees                                                         |  |      | 4,159   |   |      |   | 6,147   |      |  |   | 6,527   |  
|Postage, delivery and supplies                                            |  |      | 3,611   |   |      |   | 3,355   |      |  |   | 3,238   |  
|Marketing                                                                 |  |      | 1,809   |   |      |   | 2,412   |      |  |   | 2,306   |  
|Core deposits and other intangibles amortization                          |  |      | 2,137   |   |      |   | 1,012   |      |  |   | 521     |  
|Acquisition costs                                                         |  |      | 920     |   |      |   | 638     |      |  |   | 831     |  
|Net gains and carrying costs of other real estate and foreclosed property |  |      | (92     | ) |      |   | (109    | )    |  |   | (6      | )
|Other                                                                     |  |      | 18,562  |   |      |   | 18,728  |      |  |   | 14,920  |  
|                                                                          |  |      |         |   |      |   |         |      |  |   |         |  
|Total                                                                     |  | $    | 139,354 |   |      | $ | 131,186 |      |  | $ | 110,646 |  
|                                                                          |  |      |         |   |      |   |         |      |  |   |         |  



22



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##### Table of Contents

##### Index to Financial Statements

Total noninterest expense for 2007 increased $8.2 million compared to 2006. This increase was due to the three
acquisitions we completed since the third quarter of 2006, which contributed $10.6 million for the year ended 2007. Details of the changes in various components of noninterest expense are discussed below.

Salaries and employee benefits for 2007 increased $5.0 million compared to 2006. This increase was primarily due to three acquisitions completed since the third quarter
of 2006. Combined, these acquisitions resulted in additional salaries and benefits of approximately $6.6 million. In addition, we paid $450 thousand related to an employee severance payment during the second quarter of 2007. Excluding acquisitions,
we were able to reduce overall salaries and benefits through our customer focused process improvement program with particular progress in achieving planned attrition in certain back office departments, continued right-sizing of our front office
banking staff, as well as the continued implementation of our disciplined expense management.

Salaries and employee benefits for 2006 increased $14.8
million compared to 2005. This increase was due, in part, to an increase in staffing levels as we added 60 full-time equivalent employees during 2006 principally related to new office additions and to support growth. During 2006, we added
experienced key officers to further implement our growth strategy. Additionally, we experienced higher incentive compensation expense as we crossed higher thresholds of production and profitability.

Occupancy expense for 2007 increased $2.3 million compared to 2006. During 2006, we completed three separate sale/leaseback transactions of 18 banking centers resulting
in additional rental expense which was partially offset by a reduction in depreciation. Additionally, since the third quarter of 2006, we have added nine banking centers in conjunction with the BOTH and Partners Bank acquisitions.

Technology expense increased $2.0 million for 2007 compared to 2006 and $1.4 million for 2006 compared to 2005. The increase in 2007 compared to 2006 was primarily due
to three acquisitions completed since the third quarter of 2006 which contributed approximately $962 thousand of additional expense. In 2007 and 2006, depreciation increased due to hardware and customer products added including an upgrade in the
Banks deposit system.

Professional fees decreased $2.0 million for 2007 compared to 2006 primarily due to a decrease in consulting fees. During the
first quarter of 2007, we reevaluated our need for the use of consultants and other professionals and determined that in certain areas we have the internal resources and skills necessary to handle these specialized tasks. Professional fees decreased
$380 thousand for 2006 compared to 2005 due, in part, to a decrease in legal fees primarily related to a decrease in nonperforming assets over the prior year.

In 2007, we recorded $920 thousand in acquisition-related expenses incurred in connection with the acquisitions of Partners Bank and MBM Advisors. In 2006, we recorded $638 thousand in acquisition-related expenses incurred in connection
with the acquisition of BOTH. Acquisition related expenses include certain contract termination costs, retention bonuses and data processing costs related to the conversions of computer systems.

Other noninterest expense was $18.6 million for 2007, down $166 thousand compared to 2006. Since the third quarter of 2006, we have completed three acquisitions which
contributed approximately $1.5 million in noninterest expense. This increase was partially offset by the write-off of $1.3 million of remaining unamortized debt issuance costs related to the prepayment of $29.6 million of junior subordinated debt in
2006. Other noninterest expense was $18.7 million for 2006, up $3.8 million or 25.5% compared to 2005, due in part, the write-off of $1.3 million of unamortized debt issuance costs in 2006.

Income Taxes.We provided $25.7 million, $21.9 million and $16.0 million for federal and state income taxes for 2007, 2006 and 2005, respectively. The
effective tax rates for 2007, 2006 and 2005 were approximately 33%, 32% and 31%, respectively. During 2005, the Internal Revenue Service commenced an examination of our federal income tax return for the 2003 tax year. This examination was completed
during the third quarter of 2006, resulting in an additional federal income tax obligation of $1.2 million. This obligation was previously accrued as part of our overall tax contingency reserve. During 2006 and 2005, we revised our estimate to
remove contingent liabilities totaling $473 thousand and $851 thousand, respectively, related to the expiration of previous tax



23



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##### Table of Contents

##### Index to Financial Statements

contingencies. These reductions resulted in lower effective tax rates during these periods.

We expect our effective tax rate to continue to run at the 33% level dependent largely upon the size of our tax-exempt securities portfolio and bank-owned life insurance income.

Financial Condition

Loans Held for Investment.The
following table summarizes our loan portfolio by type, excluding loans held for sale as of December 31 (dollars in thousands):



|                          |  |        |           |   |       |   |        |      |           |  |       |        |  |      |           |  |        |   |   |   |           |        |       |   |  |   |           |  |       |  
|------------------------- |  | ------ | --------- | - | ----- | - | ------ | ---- | --------- |  | ----- | ------ |  | ---- | --------- |  | ------ | - | - | - | --------- | ------ | ----- | - |  | - | --------- |  | ----- | -
|                          |  | 2007   |           |   | 2006  |   |        | 2005 |           |  | 2004  |        |  | 2003 |          
|                          |  | Amount |           | % |       |   | Amount |      | %         |  |       | Amount |  | %    |           |  | Amount |   | % |   |           | Amount |       | % | 
|Commercial and industrial |  | $      | 912,604   |   | 27.3  | % |        | $    | 824,494   |  | 26.8  | %      |  | $    | 738,061   |  | 27.4   | % |   | $ | 682,209   |        | 29.2  | % |  | $ | 671,482   |  | 31.5  | %
|Real estate:              |  |        |           |   |       |   |        |      |           |  |       |        |  |      |           |  |        |   |   |   |           |        |       |   |  |   |           |  |       |  
|Commercial                |  |        | 1,387,014 |   | 41.5  | % |        |      | 1,336,465 |  | 43.4  | %      |  |      | 1,221,610 |  | 45.4   | % |   |   | 1,043,960 |        | 44.6  | % |  |   | 829,199   |  | 38.9  | %
|Construction              |  |        | 714,600   |   | 21.4  | % |        |      | 597,985   |  | 19.4  | %      |  |      | 438,454   |  | 16.3   | % |   |   | 329,982   |        | 14.1  | % |  |   | 327,295   |  | 15.4  | %
|Residential               |  |        | 226,033   |   | 6.8   | % |        |      | 209,163   |  | 6.8   | %      |  |      | 190,701   |  | 7.1    | % |   |   | 183,839   |        | 7.9   | % |  |   | 195,363   |  | 9.2   | %
|Consumer/other            |  |        | 75,626    |   | 2.3   | % |        |      | 79,642    |  | 2.6   | %      |  |      | 72,937    |  | 2.7    | % |   |   | 72,997    |        | 3.1   | % |  |   | 98,928    |  | 4.6   | %
|Foreign loans             |  |        | 23,960    |   | 0.7   | % |        |      | 30,096    |  | 1.0   | %      |  |      | 29,245    |  | 1.1    | % |   |   | 25,109    |        | 1.1   | % |  |   | 8,464     |  | 0.4   | %
|                          |  |        |           |   |       |   |        |      |           |  |       |        |  |      |           |  |        |   |   |   |           |        |       |   |  |   |           |  |       |  
|Total                     |  | $      | 3,339,837 |   | 100.0 | % |        | $    | 3,077,845 |  | 100.0 | %      |  | $    | 2,691,008 |  | 100.0  | % |   | $ | 2,338,096 |        | 100.0 | % |  | $ | 2,130,731 |  | 100.0 | %
|                          |  |        |           |   |       |   |        |      |           |  |       |        |  |      |           |  |        |   |   |   |           |        |       |   |  |   |           |  |       |  

At December 31, 2007, loans held for investment were $3.3 billion, an increase of $262 million or 8.5% over
loans held for investment at December 31, 2006. Loans held for investment acquired as a result of the acquisition of Partners Bank on March 30, 2007 totaled $133 million. The remaining increase in loans was primarily due to internal loan
growth in real estate and commercial and industrial loans which increased $70.3 million and $47.6 million, respectively. This growth during 2007 was partially offset by the sale of approximately $20 million of performing commercial real estate loans
from the held for investment portfolio, which were sold as part of our ongoing management of the size, concentration and risk profile of the commercial real estate portfolio.

Our primary lending focus is commercial loans and owner-occupied real estate loans to businesses with annual sales ranging up to $50 million. Typically, our customers have financing requirements between $50 thousand
and $5 million. The Banks legal lending limit was $91.0 million at December 31, 2007 and was not exceeded by any single loan relationship. At December 31, 2007, commercial real estate loans and commercial and industrial loans were
41.5% and 27.3%, respectively, of loans held for investment.

We make commercial loans primarily to small and medium-sized businesses and to professionals.
Our commercial loan products include revolving lines of credit, letters of credit, working capital loans, loans to finance accounts receivable and inventory and equipment finance leases. Commercial loans typically have floating rates of interest and
are for varying terms (generally not exceeding three years). In most instances, these loans 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, we make commercial loans that are secured by owner-occupied real estate, as well as other business assets.

Commercial mortgage loans are often secured by first liens on real estate, typically have floating interest rates, and are most often amortized over a 15-year period with balloon payments due at the end of three years. In underwriting
commercial mortgage loans, we give consideration 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.

Our Capital Markets group originates, co-originates or purchases first-lien, commercial real
estate mortgage loans referred by other financial institutions nationwide. These loans generally have low loan-to-value ratios (below 60%) and many have a U.S. Small Business Administration second lien behind our first lien. We utilize
real estate appraisers familiar with the geographic region in which the property is located in evaluating potential



24



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##### Table of Contents

##### Index to Financial Statements

loans. These appraisals are reviewed by a third-party appraisal review vendor for accuracy and compliance with our underwriting standards and banking
regulations. These loans supplement our growth in our niche market segment, small to medium-sized businesses.

We also make loans to finance the
construction of residential and nonresidential properties, such as retail shopping centers and commercial office buildings. Generally, construction loans are secured by first liens on real estate and have floating interest rates. We conduct 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 our 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 business relationships with
us.

The following table presents loan maturities of the total loan portfolio excluding residential mortgage and consumer loans at December 31, 2007
(in thousands). The table also presents the portion of loans that have fixed interest rates or variable interest rates that re-price at various intervals over the life of the loan.



|                                    |  |                       |           |                                    |   |                     |  |       |         |  |   |          
|----------------------------------- |  | --------------------- | --------- | ---------------------------------- | - | ------------------- |  | ----- | ------- |  | - | ---------
|                                    |  | Due inOne Yearor Less |           | Due AfterOne YearThroughFive Years |   | Due AfterFive Years |  | Total
|Commercial and industrial           |  | $                     | 602,484   |                                    | $ | 268,116             |  | $     | 42,004  |  | $ | 912,604  
|Real estatecommercial              |  |                       | 181,075   |                                    |   | 649,016             |  |       | 556,923 |  |   | 1,387,014
|Real estateconstruction            |  |                       | 361,153   |                                    |   | 258,489             |  |       | 94,958  |  |   | 714,600  
|Foreign loans                       |  |                       | 9,012     |                                    |   | 14,607              |  |       | 341     |  |   | 23,960   
|                                    |  |                       |           |                                    |   |                     |  |       |         |  |   |          
|Total loans                         |  | $                     | 1,153,724 |                                    | $ | 1,190,228           |  | $     | 694,226 |  | $ | 3,038,178
|                                    |  |                       |           |                                    |   |                     |  |       |         |  |   |          
|Loans with a fixed interest rate    |  | $                     | 269,622   |                                    | $ | 831,454             |  | $     | 226,952 |  | $ | 1,328,028
|Loans with a floating interest rate |  |                       | 884,102   |                                    |   | 358,774             |  |       | 467,274 |  |   | 1,710,150
|                                    |  |                       |           |                                    |   |                     |  |       |         |  |   |          
|Total loans                         |  | $                     | 1,153,724 |                                    | $ | 1,190,228           |  | $     | 694,226 |  | $ | 3,038,178
|                                    |  |                       |           |                                    |   |                     |  |       |         |  |   |          

As of December 31, 2007, there was no concentration of loans to any one industry exceeding 10% of total loans
nor were there any loans classified as highly leveraged transactions. The Bank had no material foreign loans outstanding for the years ended December 31, 2003 through 2007 that are not cash secured or Ex-Im Bank guaranteed.

At December 31, 2007, loans held for investment were 90.9% of deposits and 73.6% of total assets. As of December 31, 2007, we had no material concentrations of
loans. Loans held for investment were 92.3% of deposits and 74.7% of total assets at December 31, 2006.

Loans Held for Sale.Loans held
for sale totaled $78.4 million at December 31, 2007, as compared with $54.7 million at December 31, 2006. Loans held for sale acquired as a result of the acquisition of Partners Bank on March 30, 2007 totaled $9.4 million. Loans held
for sale include the guaranteed portion of Small Business Administration (SBA) loans originated by the Bank and loans originated as part of the Banks wholesale lending operations. Due to the timing of the purchases and sales of SBA and other
loans to investors, the balance of loans in the held for sale category at any given time may vary.

Loans are classified as held for sale when management
has positively determined that the loans will be sold in the foreseeable future and we have the ability to do so. The classification may be made upon origination or subsequent to the origination or purchase. Once a decision has been made to sell
loans not previously classified as held for sale, such loans are transferred into the held for sale classification and carried at the lower of cost or fair value.



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##### Index to Financial Statements

Securities. The carrying amount of securities we held at December 31
is shown below (dollars in thousands):



|                                                                    |  |        |         |   |       |   |        |      |         |  |       |        |  |   |         |  |       |  
|------------------------------------------------------------------- |  | ------ | ------- | - | ----- | - | ------ | ---- | ------- |  | ----- | ------ |  | - | ------- |  | ----- | -
|                                                                    |  | 2007   |         |   | 2006  |   |        | 2005 |        
|                                                                    |  | Amount |         | % |       |   | Amount |      | %       |  |       | Amount |  | % |        
|Available-for-Sale                                                  |  |        |         |   |       |   |        |      |         |  |       |        |  |   |         |  |       |  
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $      | 11,601  |   | 2.4   | % |        | $    | 6,425   |  | 1.6   | %      |  | $ | 9,924   |  | 2.0   | %
|Obligations of states of the U.S. and political subdivisions        |  |        | 1,714   |   | 0.4   | % |        |      | 2,321   |  | 0.6   | %      |  |   | 3,326   |  | 0.7   | %
|Mortgage-backed securities and collateralized mortgage obligations  |  |        | 448,779 |   | 94.1  | % |        |      | 385,815 |  | 94.3  | %      |  |   | 466,728 |  | 94.1  | %
|Other securities                                                    |  |        | 14,596  |   | 3.1   | % |        |      | 14,790  |  | 3.5   | %      |  |   | 15,967  |  | 3.2   | %
|                                                                    |  |        |         |   |       |   |        |      |         |  |       |        |  |   |         |  |       |  
|Total                                                               |  | $      | 476,690 |   | 100.0 | % |        | $    | 409,351 |  | 100.0 | %      |  | $ | 495,945 |  | 100.0 | %
|                                                                    |  |        |         |   |       |   |        |      |         |  |       |        |  |   |         |  |       |  
|Held-to-Maturity                                                    |  |        |         |   |       |   |        |      |         |  |       |        |  |   |         |  |       |  
|Obligations of states of the U.S. and political subdivisions        |  | $      | 96,593  |   | 53.6  | % |        | $    | 91,946  |  | 56.0  | %      |  | $ | 58,288  |  | 47.4  | %
|Mortgage-backed securities and collateralized mortgage obligations  |  |        | 83,493  |   | 46.4  | % |        |      | 72,317  |  | 44.0  | %      |  |   | 64,765  |  | 52.6  | %
|                                                                    |  |        |         |   |       |   |        |      |         |  |       |        |  |   |         |  |       |  
|Total                                                               |  | $      | 180,086 |   | 100.0 | % |        | $    | 164,263 |  | 100.0 | %      |  | $ | 123,053 |  | 100.0 | %
|                                                                    |  |        |         |   |       |   |        |      |         |  |       |        |  |   |         |  |       |  

At December 31, 2007, securities totaled $657 million, an increase of $83.2 million, or 14.5%, from $574
million at December 31, 2006. These securities represented 14.5% and 13.9% of total assets as of December 31, 2007 and 2006, respectively. We added $11.0 million to the securities portfolio due to the acquisition of Partners Bank. We plan
for minimal near-term growth in the investment portfolio depending upon the market levels of interest rates and the need to maintain adequate liquidity.

Net unrealized losses on the available-for-sale securities were $2.7 million at December 31, 2007 as compared to $10.2 million at December 31, 2006. Management believes that the unrealized losses on our securities portfolio were
caused primarily by interest rate increases. Because the decline in market value is attributable to changes in interest rates and not credit quality, and because we have the ability and intent to hold those investments until a recovery of fair
value, which may be at maturity, we do not consider those investments to be other-than-temporarily impaired at December 31, 2007. We recorded a realized loss of $562 thousand on certain interest-only securities during the fourth quarter of
2006. These securities are tied to an underlying government guaranteed loan and are subject to prepayment and interest rate fluctuations. These securities had been in an unrealized loss position since the fourth quarter of 2005. Given the prepayment
factors for the underlying loan and managements inability to determine when a full recovery of the value may occur, management considered these securities to be other than temporarily impaired at December 31, 2006.



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##### Index to Financial Statements

The carrying amount of securities at December 31, 2007, by contractual maturity is shown below (dollars in
thousands):



|                                                                    |  |                        |        |                      |                                     |   |        |                                      |                      |  |                    |        |  |                      |        |  |        |   |                      |   |        |  |      |   |  |   |        
|------------------------------------------------------------------- |  | ---------------------- | ------ | -------------------- | ----------------------------------- | - | ------ | ------------------------------------ | -------------------- |  | ------------------ | ------ |  | -------------------- | ------ |  | ------ | - | -------------------- | - | ------ |  | ---- | - |  | - | -------
|                                                                    |  | Due in One Yearor Less |        |                      | Due after One YearthroughFive Years |   |        | Due After FiveYears throughTen Years |                      |  | Due AfterTen Years |        |  | Total               
|                                                                    |  | Amount                 |        | WeightedAverageYield |                                     |   | Amount |                                      | WeightedAverageYield |  |                    | Amount |  | WeightedAverageYield |        |  | Amount |   | WeightedAverageYield |   |       
|Available-for-Sale                                                  |  |                        |        |                      |                                     |   |        |                                      |                      |  |                    |        |  |                      |        |  |        |   |                      |   |        |  |      |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                      | 9,832  |                      | 4.76                                | % |        | $                                    | 1,769                |  | 4.89               | %      |  | $                    |       |  |       |   |                      | $ |       |  |     |   |  | $ | 11,601 
|Obligations of states of the U.S. and political subdivisions        |  |                        | 361    |                      | 3.94                                | % |        |                                      | 1,033                |  | 3.84               | %      |  |                      | 320    |  | 5.44   | % |                      |   |       |  |     |   |  |   | 1,714  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                        | 15,633 |                      | 4.01                                | % |        |                                      | 309,118              |  | 4.64               | %      |  |                      | 83,067 |  | 4.99   | % |                      |   | 40,961 |  | 5.04 | % |  |   | 448,779
|Other securities                                                    |  |                        | 14,596 |                      | 0.82                                | % |        |                                      |                     |  |                   |        |  |                      |       |  |       |   |                      |   |       |  |     |   |  |   | 14,596 
|                                                                    |  |                        |        |                      |                                     |   |        |                                      |                      |  |                    |        |  |                      |        |  |        |   |                      |   |        |  |      |   |  |   |        
|Total                                                               |  | $                      | 40,422 |                      | 3.04                                | % |        | $                                    | 311,920              |  | 4.64               | %      |  | $                    | 83,387 |  | 4.99   | % |                      | $ | 40,961 |  | 5.04 | % |  | $ | 476,690
|                                                                    |  |                        |        |                      |                                     |   |        |                                      |                      |  |                    |        |  |                      |        |  |        |   |                      |   |        |  |      |   |  |   |        
|Held-to-Maturity                                                    |  |                        |        |                      |                                     |   |        |                                      |                      |  |                    |        |  |                      |        |  |        |   |                      |   |        |  |      |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                      | 7,655  |                      | 4.29                                | % |        | $                                    | 48,976               |  | 3.65               | %      |  | $                    | 35,625 |  | 3.76   | % |                      | $ | 4,337  |  | 4.07 | % |  | $ | 96,593 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                        | 2,347  |                      | 3.78                                | % |        |                                      | 48,518               |  | 4.69               | %      |  |                      | 29,275 |  | 5.65   | % |                      |   | 3,353  |  | 5.44 | % |  |   | 83,493 
|                                                                    |  |                        |        |                      |                                     |   |        |                                      |                      |  |                    |        |  |                      |        |  |        |   |                      |   |        |  |      |   |  |   |        
|Total                                                               |  | $                      | 10,002 |                      | 4.17                                | % |        | $                                    | 97,494               |  | 4.17               | %      |  | $                    | 64,900 |  | 4.61   | % |                      | $ | 7,690  |  | 4.67 | % |  | $ | 180,086
|                                                                    |  |                        |        |                      |                                     |   |        |                                      |                      |  |                    |        |  |                      |        |  |        |   |                      |   |        |  |      |   |  |   |        

The tax equivalent book yield on the Banks securities portfolio for 2007 was 4.6%. The weighted-average life
of the portfolio was approximately 4.1 years, and the modified duration was approximately 3.5 years at December 31, 2007. The tax equivalent book yield on the Banks securities portfolio for 2006 was 4.5%. The weighted-average life of the
portfolio was approximately 3.1 years, and the modified duration was approximately 2.7 years at December 31, 2006.

We did not own the securities of
any one issuer (other than the U.S. government and its agencies) of which the aggregate adjusted cost exceeded 10% of consolidated shareholders equity at December 31, 2007.

Deposits.Our lending and investing activities are funded primarily by deposits, approximately 73% of which were core deposits at December 31, 2007. Core deposits exclude brokered deposits and time
deposits over $100,000. These jumbo deposits are characteristically more sensitive to changes in interest rates and, thus we do not consider these a part of our core funding.

Total deposits as of December 31, 2007 increased $339 million to $3.7 billion, up 10.2% compared to $3.3 billion at December 31, 2006. Deposits acquired in the acquisition of Partners Bank on March 30,
2007 totaled $166 million. The internal deposit growth we experienced during 2007 was driven primarily by interest-bearing and certificates and other time deposits. Interest-bearing deposits at December 31, 2007 were $2.6 billion as compared to
$2.3 billion at December 31, 2006, an increase of $305 million or 13.4%. Approximately 70.3% of deposits at December 31, 2007 were interest-bearing. The percentage of interest-bearing demand and noninterest-bearing demand deposits to total
deposits as of December 31, 2007 was 38.2% and 29.7%, respectively, and our loan to deposit ratio at December 31, 2007 was 93.0%.



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##### Index to Financial Statements

The average balances and weighted average rates paid on deposits for each of the past three years ended December 31
are presented below (dollars in thousands):



|                                             |  |                |           |             |      |   |                |      |             |  |      |                |  |             |           |  |      |  
|-------------------------------------------- |  | -------------- | --------- | ----------- | ---- | - | -------------- | ---- | ----------- |  | ---- | -------------- |  | ----------- | --------- |  | ---- | -
|                                             |  | 2007           |           |             | 2006 |   |                | 2005 |            
|                                             |  | AverageBalance |           | AverageRate |      |   | AverageBalance |      | AverageRate |  |      | AverageBalance |  | AverageRate |          
|Noninterest-bearing demand deposits          |  | $              | 1,080,099 |             |      |   |                | $    | 1,013,788   |  |      |                |  | $           | 936,215   |  |      |  
|Interest-bearing demand and savings deposits |  |                | 1,304,168 |             | 2.24 | % |                |      | 1,093,652   |  | 1.64 | %              |  |             | 978,218   |  | 0.87 | %
|Time deposits                                |  |                | 1,065,147 |             | 4.72 | % |                |      | 803,698     |  | 4.10 | %              |  |             | 641,218   |  | 2.88 | %
|Brokered certificates of deposit             |  |                | 126,246   |             | 4.31 | % |                |      | 114,734     |  | 4.08 | %              |  |             | 51,506    |  | 3.14 | %
|                                             |  |                |           |             |      |   |                |      |             |  |      |                |  |             |           |  |      |  
|Total deposits                               |  | $              | 3,575,660 |             | 3.40 | % |                | $    | 3,025,872   |  | 2.76 | %              |  | $           | 2,607,157 |  | 1.71 | %
|                                             |  |                |           |             |      |   |                |      |             |  |      |                |  |             |           |  |      |  

Average total deposits increased $550 million in 2007 compared to 2006. The increase during 2007 was primarily
attributable to internal deposit growth and the acquisition of Partners Bank completed in March 2007. The changes in deposit mix and interest rates increased the average cost of funds for deposits by 64 basis points in 2007.

Average total deposits increased $419 million in 2006 compared to 2005. The increase during 2006 was primarily attributable to internal deposit growth and the
acquisition of BOTH completed in September 2006. The changes in deposit mix and interest rates increased the average cost of funds for deposits by 105 basis points in 2006.

Average brokered certificates of deposit totaled $126 million in 2007, $115 million in 2006 and $52 million in 2005. We utilize brokered deposits together with other borrowed funds as a source of funding for our
lending and investment activities.

The maturities of time deposits of $100 thousand or more at December 31, 2007 are
shown below (in thousands):



|                               |  |   |        
|------------------------------ |  | - | -------
|Three months or less           |  | $ | 491,804
|Over three through six months  |  |   | 100,951
|Over six through twelve months |  |   | 196,119
|Thereafter                     |  |   | 50,836 
|                               |  |   |        
|                               |  | $ | 839,710
|                               |  |   |        

Other Borrowed Funds. Deposits are the primary source of funds for our lending, investment and
general business activities. As of December 31, 2007, we had $197 million in other borrowings compared to $221 million at December 31, 2006, a decrease of $23.5 million or 10.7% due to deposit growth. Our primary source of other borrowings
is the Federal Home Loan Bank (FHLB). FHLB advances are available to us under a security and pledge agreement. At December 31, 2007, we had total funds of $1.0 billion available under this agreement of which $188 million was
outstanding. We also had other credit facilities available to us at December 31, 2007 through various correspondent banking and investment dealer relationships.



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##### Index to Financial Statements

Details of other borrowed funds are as follows (dollars in thousands):



|                                                  |  |                                 |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                  |  | For the Year Ended December 31, |        
|                                                  |  | 2007                            |         |   | 2006 |   |         | 2005 | 
|Federal Home Loan Bank advances                   |  |                                 |         |   |      |   |         |      |  |   |         |  
|Balance outstanding at period-end                 |  | $                               | 187,500 |   |      | $ | 193,500 |      |  | $ | 370,000 |  
|Weighted average interest rate at period-end      |  |                                 | 2.91    | % |      |   | 5.36    | %    |  |   | 3.98    | %
|Maximum outstanding at any month-end              |  | $                               | 190,000 |   |      | $ | 381,000 |      |  | $ | 476,000 |  
|Daily average balance                             |  |                                 | 104,338 |   |      |   | 312,746 |      |  |   | 433,373 |  
|Weighted average interest rate for the period     |  |                                 | 5.05    | % |      |   | 4.98    | %    |  |   | 3.22    | %
|Federal funds purchased and repurchase agreements |  |                                 |         |   |      |   |         |      |  |   |         |  
|Balance outstanding at period-end                 |  | $                               | 9,647   |   |      | $ | 27,175  |      |  | $ | 22,850  |  
|Weighted average interest rate at period-end      |  |                                 | 4.32    | % |      |   | 5.43    | %    |  |   | 4.40    | %
|Maximum outstanding at any month-end              |  | $                               | 36,533  |   |      | $ | 35,050  |      |  | $ | 41,375  |  
|Daily average balance                             |  |                                 | 30,010  |   |      |   | 32,354  |      |  |   | 33,405  |  
|Weighted average interest rate for the period     |  |                                 | 5.20    | % |      |   | 5.23    | %    |  |   | 3.46    | %

At December 31, 2007, borrowings under FHLB advances totaled $188 million. The average interest rate on these
borrowings was 2.91% at December 31, 2007. At December 31, 2007, the Company had $40.0 million of FHLB advances that mature in ten years and $500 thousand of FHLB advances that mature in three years. The remaining advances had maturities
of under ten days. These borrowings are collateralized by single family residential mortgage loans, certain pledged securities, FHLB stock and any funds on deposit with the FHLB. We utilize these borrowings to meet liquidity needs. Maturing advances
are replaced by drawing on available cash, making additional borrowings or through increased customer deposits.

Federal funds purchased are available
lines at correspondent banks that typically mature within one to ninety days. As of December 31, 2007, federal funds outstanding with a correspondent bank were $9.2 million and payable upon demand. The Bank also sells certain securities under
agreements to repurchase. Repurchase agreements are stated at the amount of cash received in connection with the transaction and totaled $422 thousand at December 31, 2007. The agreements are treated as collateralized financing transactions and
the obligations to repurchase securities sold are reflected as a liability in the balance sheet. The securities underlying the agreements remain in the asset accounts.

Notes Payable.We maintain a $40 million line of credit with Wells Fargo Bank. This line of credit is available for general corporate purposes including the funding of potential acquisitions. The credit
facility contains certain restrictive loan covenants, including, among others, covenants limiting our ability to merge with another entity, make any substantial changes in the nature of our business, dispose of a substantial or material amount of
assets other than in the ordinary course of business, guarantee obligations of third parties, make loans or investments in any third party in excess of $30 million and pledge our assets. We did not have any borrowings under our credit facility with
Wells Fargo Bank at December 31, 2007 or 2006.

Subordinated Debt.In April 2003, the Bank raised approximately $50 million through a
private offering of subordinated notes. These subordinated notes bear interest at a fixed rate of 7.375% and mature on April 15, 2013. Interest payments are due semi-annually. The subordinated notes may not be redeemed or called prior to their
maturity. In June 2003, we entered into an interest rate swap agreement in which the Bank swapped the fixed rate to a floating rate. Under the terms of the swap agreement, we receive a fixed coupon rate of 7.375% and pay a variable interest rate
equal to the three-month LIBOR that is reset on a quarterly basis, plus 3.62%. This swap is designated as a fair-value hedge that qualifies for the shortcut method of accounting. The fair value of the swap is currently included in other
liabilities as the hedge is considered effective. If the swap were to become ineffective the change in the fair value would be reflected in our statement of income. The swaps floating rate on December 31, 2007 was 8.87%.



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##### Index to Financial Statements

Junior Subordinated Debt/Company Obligated Mandatorily Redeemable Trust Preferred Securities.As of
December 31, 2007, we had the following issues of trust preferred securities outstanding and junior subordinated debt owed to trusts (dollars in thousands):



|                     |  |                    |  |                                     |        |               |                          |                                      |   |                     |  |                   
|-------------------- |  | ------------------ |  | ----------------------------------- | ------ | ------------- | ------------------------ | ------------------------------------ | - | ------------------- |  | ------------------
|Description          |  | Issuance Date      |  | TrustPreferredSecuritiesOutstanding |        | Interest Rate |                          | JuniorSubordinatedDebt Owed ToTrusts |   | Final Maturity Date
|Statutory Trust One  |  | August 30, 2002    |  | $                                   | 20,000 |               | 3-month LIBOR plus 3.45% |                                      | $ | 20,619              |  | August 30, 2032   
|Capital Trust III    |  | September 26, 2002 |  |                                     | 31,250 |               | 8.30% Fixed              |                                      |   | 32,217              |  | September 26, 2032
|BOTH Capital Trust I |  | June 30, 2003      |  |                                     | 4,000  |               | 3-month LIBOR plus 3.10% |                                      |   | 4,124               |  | July 7, 2033      
|Capital Trust IV     |  | March 26, 2007     |  |                                     | 25,000 |               | 3-month LIBOR plus 1.60% |                                      |   | 25,774              |  | June 15, 2037     
|                     |  |                    |  |                                     |        |               |                          |                                      |   |                     |  |                   
|Total                |  |                    |  | $                                   | 80,250 |               |                          |                                      | $ | 82,734              |  |                   
|                     |  |                    |  |                                     |        |               |                          |                                      |   |                     |  |                   

Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust securities and
investing the proceeds thereof in junior subordinated debentures of Sterling Bancshares for Statutory Trust One, Capital Trust III and Capital Trust IV and BOTH, Inc. for BOTH Capital Trust I, the sole asset of each trust. The preferred trust
securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payments of the junior subordinated debentures held by the trust. The common securities of each
trust are wholly-owned by Sterling Bancshares. Each trusts ability to pay amounts due on the trust preferred securities is solely dependent upon Sterling Bancshares making payment on the related junior subordinated debentures. Sterling
Bancshares obligations under the junior subordinated debentures and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by Sterling Bancshares of each respective trusts obligations under the trust
securities issued by each respective trust.

Each issuance of trust preferred securities outstanding is mandatorily redeemable 30 years after issuance and
is callable beginning five years after issuance if certain conditions are met (including the receipt of appropriate regulatory approvals). The trust preferred securities may be prepaid earlier upon the occurrence and continuation of certain events
including a change in their tax status or regulatory capital treatment. In each case, the redemption price is equal to 100% of the face amount of the trust preferred securities, plus the accrued and unpaid distributions thereon through the
redemption date.

On March 1, 2005, the Federal Reserve adopted final rules for the capital treatment of trust preferred securities. The rules, as
applicable to us, when fully transitioned and applicable on March 31, 2009, will limit the aggregate amount of trust preferred securities and certain other capital elements to 25% of Tier 1 capital, net of goodwill. At December 31, 2007,
the entire amount of the $80.3 million would count as Tier 1 capital. Any excess amount not qualifying for Tier 1 capital may be included in Tier 2 capital. This amount is limited to 50% of Tier 1 capital. There is a five-year transition period for
banks to become compliant with the new rules. Additionally, the rules provide that trust preferred securities no longer qualify for Tier 1 capital within 5 years of their maturity. Refer to Note 18 to the Consolidated Financial Statements for a
discussion of the impact of the final rule on our regulatory capital ratios.

On March 26, 2007, the Company completed the issuance and sale in a
private placement of $25.0 million in aggregate principal amount of trust preferred securities issued by the Companys newly formed subsidiary, Sterling Bancshares Capital Trust IV, a Delaware statutory trust (Trust IV). The trust
preferred securities may be called at par by the Company at any time after June 15, 2012 and require quarterly distributions of interest by Trust IV to the holder of the trust preferred securities. Distributions will be payable quarterly at a
floating interest



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##### Index to Financial Statements

rate equal to the 3-month LIBOR plus 1.60% per annum. Trust IV simultaneously issued 774 shares of its common securities to the Company for the purchase
price of $774 thousand, which constitutes all of the issued and outstanding common securities of Trust IV.

Asset Quality

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

Nonperforming assets consisted of the following (in thousands):



|                                          |  |      |        |      |   |        |  |      |        |      |   |        |  |   |       
|----------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                          |  | 2007 |        | 2006 |   | 2005   |  | 2004 |        | 2003
|Nonperforming loans:                      |  |      |        |      |   |        |  |      |        |      |   |        |  |   |       
|Nonaccrual                                |  | $    | 19,445 |      | $ | 10,611 |  | $    | 21,841 |      | $ | 20,605 |  | $ | 33,887
|Restructured                              |  |      | 769    |      |   | 776    |  |      |       |      |   |       |  |   |      
|                                          |  |      |        |      |   |        |  |      |        |      |   |        |  |   |       
|Total nonperforming loans                 |  |      | 20,214 |      |   | 11,387 |  |      | 21,841 |      |   | 20,605 |  |   | 33,887
|Foreclosed assets:                        |  |      |        |      |   |        |  |      |        |      |   |        |  |   |       
|Real estate acquired by foreclosure       |  |      | 3,683  |      |   | 1,465  |  |      | 460    |      |   | 1,536  |  |   | 2,124 
|Other repossessed assets                  |  |      | 152    |      |   | 404    |  |      | 137    |      |   | 216    |  |   | 169   
|                                          |  |      |        |      |   |        |  |      |        |      |   |        |  |   |       
|Total foreclosed assets                   |  |      | 3,835  |      |   | 1,869  |  |      | 597    |      |   | 1,752  |  |   | 2,293 
|                                          |  |      |        |      |   |        |  |      |        |      |   |        |  |   |       
|Total nonperforming assets                |  | $    | 24,049 |      | $ | 13,256 |  | $    | 22,438 |      | $ | 22,357 |  | $ | 36,180
|                                          |  |      |        |      |   |        |  |      |        |      |   |        |  |   |       
|                                          |  |      |        |      |  
|Nonperforming loans to period-end loans   |  |      | 0.59%  |      |   | 0.36%  |  |      | 0.81%  |      |   | 0.88%  |  |   | 1.57% 
|Nonperforming assets to period-end assets |  |      | 0.53%  |      |   | 0.32%  |  |      | 0.60%  |      |   | 0.67%  |  |   | 1.13% 
|                                          |  |      |        |      |  
|Accruing loans past due 90 days or more   |  | $    | 1,304  |      | $ | 2,731  |  | $    | 162    |      | $ | 2,395  |  | $ | 35    

Nonperforming assets were $24.0 million at December 31, 2007, a $10.8 million increase from $13.3 million at
December 31, 2006. This increase can be attributed to three relationships and are not indicative of any systemic problem in our portfolio, the economy or concentrated in any industry.

Interest foregone on nonaccrual loans was approximately $1.9 million and $1.3 million during 2007 and 2006, respectively. Accruing loans past due 90 days or more at
December 31, 2007 totaled $1.3 million compared to $2.7 million at December 31, 2006 and consisted primarily of government guaranteed loans.

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

The provision for credit losses for 2007 was $3.8 million as compared to
$4.1 million for 2006. The lower provision for credit losses during 2007 is reflective of the favorable improvements in net charge-offs and of the general improvement in our asset quality that has been a function of both a healthy Texas economy and
a strengthening in our credit culture.

Net charge-offs were $2.9 million or 0.09% of average loans for 2007 compared to $5.7 million or 0.20% of average
loans during 2006. Net charge-offs decreased $2.8 million during 2007 as compared to 2006. These



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##### Index to Financial Statements

improvements in asset quality are primarily attributable to several internal changes during the past two years. Some of these changes include: implementing a
consumer and micro-business loan credit scoring system, updating and revising our loan policy, standardizing our loan funding process, improving our loan approval process and enhancing our credit culture to take a more value-added risk management
approach.

The allowance for credit losses is a valuation reserve consisting of the allowance for loan losses and the reserve for unfunded lending
commitments. It is 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 our evaluation, we consider the industry diversification of the commercial loan portfolio and the
effect of changes in the local real estate market on collateral values. We also consider the results of recent regulatory examinations, our history of credit experience and our ongoing internal credit reviews.

The allowance for loan losses at December 31, 2007 was $34.4 million and represented 1.01% of total loans. The allowance for loan losses at December 31, 2007
was 170.41% of nonperforming loans, down from 281.27% at December 31, 2006. The reserve for unfunded lending commitments was $927 thousand at December 31, 2007 and 2006.

We continually monitor economic conditions in our local market areas and the probable impact on borrowers, past-due amounts, related collateral values, the number and size of non-performing loans and on the resulting
amount of charge-offs for the period.

We have several systems and procedures in place to assist in managing the overall quality of the loan portfolio. In
addition to established underwriting guidelines and approval processes, we monitor delinquency levels for any negative or adverse trends. We also perform reviews of the loan portfolios on a regular basis to identify troubled loans and to assess
their overall probability of collection.

Ongoing portfolio reviews are conducted by our internal loan review department under an established loan review
program. We are targeting a loan review penetration of at least 60-70% annually of the total commercial and real estate loan portfolios.

Through the loan
review process, we maintain an internally classified loan list, which, along with the delinquency list of loans, helps us assess the overall quality of the loan portfolios and the adequacy of the allowance for credit losses. Loans on this listing
are classified as substandard, doubtful or loss based on probability of repayment, collateral valuation and related collectibility.

All doubtful and loss
loans are considered impaired. Substandard loans are defined as impaired when based on current information and events, it is probable that we will be unable to collect all amounts due, both interest and principal, according to the contractual terms
of the loan agreement. The allowance for loan losses related to impaired loans is determined based on the difference between the carrying value of the impaired loan and its fair value. The fair value 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.

Loans classified as substandard have clear and defined weaknesses such as highly leveraged positions, unfavorable financial ratios, uncertain repayment
sources or poor financial condition, which may jeopardize the loans recoverability. Loans classified as doubtful have characteristics similar to substandard loans but with an increased risk that a loss may occur or that 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.



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##### Index to Financial Statements

At December 31, 2007, substandard loans totaled $49.6 million, of which $14.7 million were loans designated as
nonaccrual; and doubtful loans totaled $3.4 million all of which were designated as nonaccrual.

In addition to the internally classified loan list and
delinquency list of loans, we maintain a separate watch list which further aids in monitoring the loan portfolios. Watch list loans show warning elements, 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. We review these loans in assessing the adequacy of the allowance for credit losses. As of December 31, 2007 and 2006, watch list loans totaled $94.9 million and $93.4 million, respectively.

Management assigns loan grades by individual loan and allocations are made within each loan grade. 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 watch list 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, in part, on the average of the last three years actual net
charge-offs.

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



|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|----------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                  |  | Year Ended December 31, |       
|                                                                  |  | 2007                    |        |   | 2006 |   |        | 2005 |  |   | 2004   |   |  | 2003 |       
|Allowance for loan losses at January 1                            |  | $                       | 32,027 |   |      | $ | 31,230 |      |  | $ | 29,406 |   |  | $    | 30,722 |   |  | $ | 27,248 |  
|Charge-offs:                                                      |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial and industrial                                         |  |                         | 3,267  |   |      |   | 4,372  |      |  |   | 12,410 |   |  |      | 10,365 |   |  |   | 10,597 |  
|Real estate, mortgage and construction                            |  |                         | 1,066  |   |      |   | 3,879  |      |  |   | 1,768  |   |  |      | 3,405  |   |  |   | 4,486  |  
|Consumer/other                                                    |  |                         | 1,629  |   |      |   | 1,199  |      |  |   | 1,535  |   |  |      | 1,446  |   |  |   | 1,590  |  
|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total charge-offs                                                 |  |                         | 5,962  |   |      |   | 9,450  |      |  |   | 15,713 |   |  |      | 15,216 |   |  |   | 16,673 |  
|Recoveries:                                                       |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Commercial and industrial                                         |  |                         | 1,829  |   |      |   | 3,205  |      |  |   | 1,773  |   |  |      | 2,094  |   |  |   | 1,447  |  
|Real estate, mortgage and construction                            |  |                         | 47     |   |      |   | 79     |      |  |   | 711    |   |  |      | 159    |   |  |   | 157    |  
|Consumer/other                                                    |  |                         | 1,189  |   |      |   | 507    |      |  |   | 268    |   |  |      | 223    |   |  |   | 343    |  
|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total recoveries                                                  |  |                         | 3,065  |   |      |   | 3,791  |      |  |   | 2,752  |   |  |      | 2,476  |   |  |   | 1,947  |  
|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Net charge-offs                                                   |  |                         | 2,897  |   |      |   | 5,659  |      |  |   | 12,961 |   |  |      | 12,740 |   |  |   | 14,726 |  
|Allowance for credit losses associated with acquired institutions |  |                         | 1,496  |   |      |   | 2,152  |      |  |   | 761    |   |  |      |       |   |  |   | 855    |  
|Allowance for loan losses sold with divestiture                   |  |                         |       |   |      |   |       |      |  |   |       |   |  |      |       |   |  |   | (353   | )
|Provision for loan losses                                         |  |                         | 3,820  |   |      |   | 4,304  |      |  |   | 14,024 |   |  |      | 11,424 |   |  |   | 17,698 |  
|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance for loan losses at December 31                          |  | $                       | 34,446 |   |      | $ | 32,027 |      |  | $ | 31,230 |   |  | $    | 29,406 |   |  | $ | 30,722 |  
|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Reserve for unfunded loan commitments at January 1                |  |                         | 927    |   |      |   | 1,173  |      |  |   | 826    |   |  |      |       |   |  |   |       |  
|Provision for losses on unfunded loan commitments                 |  |                         |       |   |      |   | (246   | )    |  |   | 347    |   |  |      | 826    |   |  |   |       |  
|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Reserve for unfunded loan commitments at December 31              |  |                         | 927    |   |      |   | 927    |      |  |   | 1,173  |   |  |      | 826    |   |  |   |       |  
|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total allowance for credit losses at December 31                  |  | $                       | 35,373 |   |      | $ | 32,954 |      |  | $ | 32,403 |   |  | $    | 30,232 |   |  | $ | 30,722 |  
|                                                                  |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|                                                                  |  |                         |        |   |     
|Ratios:                                                           |  |                         |        |   |      |   |        |      |  |   |        |   |  |      |        |   |  |   |        |  
|Allowance for loan losses to period end loans                     |  |                         | 1.01   | % |      |   | 1.02   | %    |  |   | 1.16   | % |  |      | 1.25   | % |  |   | 1.42   | %
|Net charge-offs to average loans                                  |  |                         | 0.09   | % |      |   | 0.20   | %    |  |   | 0.51   | % |  |      | 0.58   | % |  |   | 0.60   | %
|Allowance for loan losses to period-end nonperforming loans       |  |                         | 170.41 | % |      |   | 281.27 | %    |  |   | 142.99 | % |  |      | 142.71 | % |  |   | 90.66  | %



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##### Index to Financial Statements

The following table shows the allocation of the allowance for loan losses among various categories of loans. 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. In 2006, we changed our allowance
methodology to allow more specific allocation of our reserves.



|                                                                     |  |                        |        |                                                           |      |   |        |      |                                                           |  |      |        |  |                                                           |        |  |        |   |                                                           |   |        |        |     |                                                           |  |   |        |  |     |  
|-------------------------------------------------------------------- |  | ---------------------- | ------ | --------------------------------------------------------- | ---- | - | ------ | ---- | --------------------------------------------------------- |  | ---- | ------ |  | --------------------------------------------------------- | ------ |  | ------ | - | --------------------------------------------------------- | - | ------ | ------ | --- | --------------------------------------------------------- |  | - | ------ |  | --- | -
|                                                                     |  | December 31,           |       
|                                                                     |  | 2007                   |        |                                                           | 2006 |   |        | 2005 |                                                           |  | 2004 |        |  | 2003                                                      |       
|                                                                     |  | Amount                 |        | % of loansin eachCategory toTotal LoansHeld forInvestment |      |   | Amount |      | % of loansin eachCategory toTotal LoansHeld forInvestment |  |      | Amount |  | % of loansin eachCategory toTotal LoansHeld forInvestment |        |  | Amount |   | % of loansin eachCategory toTotal LoansHeld forInvestment |   |        | Amount |     | % of loansin eachCategory toTotal LoansHeld forInvestment | 
|                                                                     |  | (dollars in thousands) |       
|Balance of allowance for loan losses at end of period applicable to: |  |                        |        |                                                           |      |   |        |      |                                                           |  |      |        |  |                                                           |        |  |        |   |                                                           |   |        |        |     |                                                           |  |   |        |  |     |  
|Commercial and industrial                                            |  | $                      | 12,887 |                                                           | 28   | % |        | $    | 12,101                                                    |  | 28   | %      |  | $                                                         | 6,429  |  | 28     | % |                                                           | $ | 8,925  |        | 30  | %                                                         |  | $ | 11,844 |  | 32  | %
|Real estate, mortgage and construction                               |  |                        | 17,645 |                                                           | 70   | % |        |      | 16,769                                                    |  | 70   | %      |  |                                                           | 8,738  |  | 69     | % |                                                           |   | 10,647 |        | 67  | %                                                         |  |   | 8,855  |  | 64  | %
|Consumer/other                                                       |  |                        | 2,851  |                                                           | 2    | % |        |      | 2,262                                                     |  | 2    | %      |  |                                                           | 730    |  | 3      | % |                                                           |   | 764    |        | 3   | %                                                         |  |   | 1,009  |  | 4   | %
|Unallocated                                                          |  |                        | 1,063  |                                                           | N/A  |   |        |      | 895                                                       |  | N/A  |        |  |                                                           | 15,333 |  | N/A    |   |                                                           |   | 9,070  |        | N/A |                                                           |  |   | 9,014  |  | N/A |  
|                                                                     |  |                        |        |                                                           |      |   |        |      |                                                           |  |      |        |  |                                                           |        |  |        |   |                                                           |   |        |        |     |                                                           |  |   |        |  |     |  
|Total                                                                |  | $                      | 34,446 |                                                           | 100  | % |        | $    | 32,027                                                    |  | 100  | %      |  | $                                                         | 31,230 |  | 100    | % |                                                           | $ | 29,406 |        | 100 | %                                                         |  | $ | 30,722 |  | 100 | %
|                                                                     |  |                        |        |                                                           |      |   |        |      |                                                           |  |      |        |  |                                                           |        |  |        |   |                                                           |   |        |        |     |                                                           |  |   |        |  |     |  

Interest Rate Sensitivity

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

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



34



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##### Index to Financial Statements

We utilize static balance sheet rate shocks to estimate the potential impact on net interest income of changes in
interest rates under various rate scenarios. This analysis estimates a percentage of change in these metrics from the stable rate base scenario versus alternative scenarios of rising and falling market interest rates by instantaneously shocking a
static balance sheet. The following table summarizes the simulated change over a 12-month horizon as of December 31, 2007 and 2006:



|                                       |  |                                          |  
|-------------------------------------- |  | ---------------------------------------- | -
|Changes inInterest Rates(Basis Points) |  | Increase (Decrease)in Net InterestIncome |  
|December 31, 2007                      |  |                                          |  
|+200                                   |  | -0.26                                    | %
|+100                                   |  | -0.08                                    | %
|Base                                   |  | 0.00                                     | %
|-100                                   |  | -0.56                                    | %
|-200                                   |  | -1.44                                    | %
|December 31, 2006                      |  |                                          |  
|+200                                   |  | 0.56                                     | %
|+100                                   |  | -0.06                                    | %
|Base                                   |  | 0.00                                     | %
|-100                                   |  | -2.78                                    | %
|-200                                   |  | -5.27                                    | %

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

Off-Balance Sheet Arrangements, Commitments, Guarantees and Contractual Obligations

Our potential obligations associated with commitments to extend credit and outstanding letters of credit as of December 31, 2007 are summarized below (in thousands).



|                             |  |                   |         |           |   |           |  |             |         |       |   |         |  |   |          
|---------------------------- |  | ----------------- | ------- | --------- | - | --------- |  | ----------- | ------- | ----- | - | ------- |  | - | ---------
|                             |  | Less thanOne Year |         | 1-3 Years |   | 3-5 Years |  | Over5 Years |         | Total
|Commitments to extend credit |  | $                 | 127,142 |           | $ | 206,079   |  | $           | 239,500 |       | $ | 356,506 |  | $ | 929,227  
|Standby letters of credit    |  |                   | 75,175  |           |   | 55,090    |  |             | 5,080   |       |   |        |  |   | 135,345  
|                             |  |                   |         |           |   |           |  |             |         |       |   |         |  |   |          
|Total                        |  | $                 | 202,317 |           | $ | 261,169   |  | $           | 244,580 |       | $ | 356,506 |  | $ | 1,064,572
|                             |  |                   |         |           |   |           |  |             |         |       |   |         |  |   |          

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 17 to the Consolidated Financial Statements for additional discussion of financial instruments with off-balance sheet risk, including a discussion of the
nature, business purpose and importance of off-balance sheet arrangements.

Off-balance sheet arrangements also include an interest rate swap, an interest
rate floor and an interest rate collar which can be found in Note 11 and our Trust Preferred Securities. Further information regarding the Trust Preferred Securities can be found in Note 10 to the Consolidated Financial Statements.



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##### Index to Financial Statements

Our future contractual cash payments are as follows (in thousands):



|                                           |  |                   |           |          |   |          |  |             |        |       |   |         |  |   |          
|------------------------------------------ |  | ----------------- | --------- | -------- | - | -------- |  | ----------- | ------ | ----- | - | ------- |  | - | ---------
|                                           |  | Less thanOne Year |           | 1-3Years |   | 3-5Years |  | Over5 Years |        | Total
|Junior subordinated debt                   |  | $                 |          |          | $ |         |  | $           |       |       | $ | 82,734  |  | $ | 82,734   
|Subordinated debt                          |  |                   |          |          |   |         |  |             |       |       |   | 50,000  |  |   | 50,000   
|Interest expense related to long-term debt |  |                   | 10,530    |          |   | 21,088   |  |             | 21,174 |       |   | 127,535 |  |   | 180,327  
|Operating leases                           |  |                   | 6,886     |          |   | 12,815   |  |             | 11,557 |       |   | 58,196  |  |   | 89,454   
|Certificates and other time deposits       |  |                   | 1,093,933 |          |   | 69,085   |  |             | 15,198 |       |   | 58      |  |   | 1,178,274
|                                           |  |                   |           |          |   |          |  |             |        |       |   |         |  |   |          
|Total                                      |  | $                 | 1,111,349 |          | $ | 102,988  |  | $           | 47,929 |       | $ | 318,523 |  | $ | 1,580,789
|                                           |  |                   |           |          |   |          |  |             |        |       |   |         |  |   |          

The amount shown above for subordinated debt represents our contractual obligation. The subordinated debt is
reflected in the consolidated balance sheet at its fair value. As discussed earlier, the Bank entered into an interest rate swap designated as a fair-value hedge of the subordinated debt. Refer to Note 11 in the Consolidated Financial Statements for
further information.

Interest expense obligations on fixed rate junior subordinated debt are calculated based on the stated contractual interest rates.
Interest expense on variable rate junior subordinated debt is calculated assuming the current 3-month LIBOR rate of 5.36% plus 3.45%. Interest expense on subordinated debt is calculated based on the fixed coupon rate of the debt adjusted for the
associated interest rate swap agreement assuming the current 3-month LIBOR rate. Refer to Notes 10 and 11 in the Consolidated Financial Statements for further information.

Capital and Liquidity

CapitalAt December 31, 2007, shareholders equity totaled $480
million or 10.6% of total assets, as compared to $409 million or 9.9% of total assets at December 31, 2006. Our risk-based capital ratios together with the minimum capital amounts and ratios as of December 31, 2007 were as follows (dollars
in thousands):



|                                         |  |        |         |       |                              |   |        |   |         |  |     |  
|---------------------------------------- |  | ------ | ------- | ----- | ---------------------------- | - | ------ | - | ------- |  | --- | -
|                                         |  | Actual |         |       | For CapitalAdequacy Purposes |  
|                                         |  | Amount |         | Ratio |                              |   | Amount |   | Ratio   | 
|Total Capital (to Risk Weighted Assets)  |  | $      | 454,030 |       | 11.1                         | % |        | $ | 327,180 |  | 8.0 | %
|Tier 1 Capital (to Risk Weighted Assets) |  |        | 369,965 |       | 9.1                          | % |        |   | 163,590 |  | 4.0 | %
|Tier 1 Capital (to Average Assets)       |  |        | 369,965 |       | 8.6                          | % |        |   | 172,366 |  | 4.0 | %

See Note 18 to our Consolidated Financial Statements for further discussion of
regulatory capital requirements.

LiquidityThe objectives of our liquidity management is to maintain our ability to meet day-to-day
deposit withdrawals and other payment obligations, to raise funds to support asset growth, to maintain reserve requirements and otherwise operate on an ongoing basis. We strive to manage a liquidity position sufficient to meet operating requirements
while maintaining an appropriate balance between assets and liabilities to meet the expectations of our shareholders. In recent years, our liquidity needs have primarily been met by growth in deposits including brokered certificates of deposit. In
addition to deposits, we have access to funds from correspondent banks and from the Federal Home Loan Bank, supplemented by amortizing securities and loan portfolios.

Sterling Bancshares must provide for its own liquidity and fund its own obligations. The primary source of Sterling Bancshares revenues is from dividends declared by the Bank. There are statutory and regulatory
provisions that could limit the ability of the Bank to pay dividends to Sterling Bancshares. At December 31, 2007, the aggregate amount of dividends, which legally could be paid without prior approval of various regulatory agencies, totaled
approximately $39.7 million. It is not anticipated that such restrictions will have an impact on the ability of Sterling Bancshares to meet its ongoing cash obligations. Additionally, Sterling



36



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##### Index to Financial Statements

Bancshares maintains a $40 million line of credit with Wells Fargo. This line of credit is available for general corporate purposes including the funding of
potential acquisitions.

During the second quarter of 2006, we prepaid all of our $29.6 million 9.20% Junior Subordinated Deferrable Interest Debentures.
The payment of these Debentures was funded by a dividend from the Bank.

On July 30, 2007, our Board of Directors amended its existing common stock
repurchase program originally adopted by the Board on April 26, 2005. The amendment increases by 750,000 shares the total number of shares that may be repurchased under the Program in the fiscal year 2007. The aggregate number of shares
originally approved by the Board for repurchase under the Program remains unchanged at 3,750,000 shares. We may repurchase our shares of common stock from time to time in the open market or through privately negotiated transactions. We plan to fund
any share repurchases from available cash or short-term borrowings.



|ITEM 7A. | Quantitative and Qualitative Disclosures about Market Risk
|-------- | ----------------------------------------------------------

For
information regarding the market risk of our financial instruments, see Managements Discussion and Analysis of Financial Condition and Results of Operations  Interest Rate Sensitivity. Our principal market risk exposure is to
interest rates.



|ITEM 8. | Financial Statements and Supplementary Data
|------- | -------------------------------------------

Refer to the index
included on page F-1 and the Consolidated Financial Statements that begin on page F-3 of this Annual Report on Form 10-K.



|ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

None.



|ITEM 9A. | Controls and Procedures
|-------- | -----------------------

The Companys Chief Executive Officer
(the CEO) and Chief Financial Officer (the CFO), after evaluating the effectiveness of the Companys disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act have concluded that, as of
the end of the fiscal year covered by this Annual Report on Form 10-K, the Companys disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports filed or
submitted under such Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and such information is accumulated and communicated to management, including the CEO and the CFO, as
appropriate, to allow timely decisions regarding required disclosures.

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



37



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##### Index to Financial Statements

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND COMPLIANCE WITH DESIGNATED
LAWS AND REGULATIONS

Managements Report on Internal Control over Financial Reporting

Management of Sterling Bancshares, Inc. and subsidiaries (the Company) is responsible for preparing the Companys annual financial statements. Management
is also responsible for establishing and maintaining adequate internal control over financial reporting. The Companys internal control over financial reporting is a process designed under the supervision of the Companys CEO and CFO to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Companys financial statements for external purposes in accordance with generally accepted accounting principles. All internal control
systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

As of December 31, 2007, management assessed the effectiveness of the Companys internal control over financial reporting based on the criteria for effective
internal control over financial reporting established in Internal ControlIntegrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. This assessment included controls over the preparation of the
schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FRY-9C) to meet the reporting requirements of Section 112 of the Federal
Deposit Insurance Corporation Improvement Act. Based on the assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2007, based on those criteria.

Deloitte & Touche LLP, the independent registered public accounting firm that audited the Companys consolidated financial statements included in this
Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Companys internal control over financial reporting as of December 31, 2007. The report is included in this Item under the heading Report
of Independent Registered Public Accounting Firm.

Compliance with Designated Laws and Regulations

Management is also responsible for ensuring compliance with the federal laws and regulations concerning loans to insiders and the federal and state laws and regulations
concerning dividend restrictions, both of which are designated by the Federal Deposit Insurance Corporation (FDIC) as safety and soundness laws and regulations.

Management assessed its compliance with the designated safety and soundness laws and regulations and has maintained records of its determinations and assessments as required by the FDIC. Based on this assessment, management believes that
the Company has complied, in all material respects, with the designated safety and soundness laws and regulations for the year ended December 31, 2007.



|                                                                    
|--------------------------------------------------------------------
|                                                                    
|LOGO                                                                
|J. Downey Bridgwater Chairman, President and Chief Executive Officer
|                                                                    
|LOGO                                                                
|Zach L. Wasson Executive Vice President and Chief Financial Officer 



38



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##### Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Sterling Bancshares, Inc.

Houston, Texas

We have audited the internal control over financial reporting of Sterling Bancshares, Inc. and subsidiaries
(the Bank) as of December 31, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because managements
assessment and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), managements assessment and our audit of the Banks internal control over
financial reporting included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C). The
Banks management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report
on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Banks internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.

A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys
principal executive and principal financial officers, or persons performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override
of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Bank maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.



39



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##### Index to Financial Statements

We have not examined and, accordingly, we do not express an opinion or any other form of assurance on managements
statement referring to compliance with laws and regulations.

We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the financial statements as of and for the year ended December 31, 2007 of the Bank and our report dated February 28, 2008 expressed an unqualified opinion on those financial statements.

LOGO

Houston, Texas

February 28, 2008



|ITEM 9B. | Other Information
|-------- | -----------------

None.

PART III



|ITEM 10. | Directors, Executive Officers and Corporate Governance
|-------- | ------------------------------------------------------

The
information required by this Item as to the directors and executive officers is hereby incorporated by reference from the information appearing under the captions Election of Directors, Information about the Board of Directors,
Committees of the Board, and Committees of the Bank, Executive Officers and Other Significant Employees, Section 16 Beneficial Ownership Reporting Compliance and Corporate Governance and Nominating Committee
in the Companys definitive proxy statement to be filed with the SEC pursuant to the Exchange Act within 120 days of year end. The information required by this Item as to the Code of Ethics for Senior Financial Officers is hereby incorporated
by reference from Item 1BusinessAvailable Information of this report.



|ITEM 11. | Executive Compensation
|-------- | ----------------------

The information required by this Item as to the management of the Company is hereby
incorporated by reference from the information appearing under the caption Compensation Discussion and Analysis, Human Resources Programs Committee Decisions, Compensation Committee Interlocks and Insider
Participation, Summary Compensation Table, Equity Compensation Plan Information, and Grants of Plan-Based Awards in the Companys definitive proxy statement to be filed with the SEC pursuant to the
Exchange Act within 120 days of year end. Notwithstanding the foregoing, in accordance with the instructions to Item 407 of Regulation S-K, the information contained in the Companys proxy statement under the subheading Human
Resources Programs Committee Decisions shall be deemed Furnished, and not Filed, in this Form 10-K, and shall not be incorporated by reference into any Filing under the Securities Act or the Exchange Act as a result of Furnishing, except to
the extent the Company specifically incorporates it by reference.



|ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

The information required by this Item as to the ownership by management and others of securities of the Company is hereby incorporated by reference from the information appearing under the captions Security
Ownership of Certain Beneficial Owners and Management and Equity Compensation Plan Information in the Companys definitive proxy statement to be filed with the SEC pursuant to the Securities Exchange Act of 1934 within 120
days of year end.



40



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##### Index to Financial Statements

|ITEM 13. | Certain Relationships and Related Transactions, and Director Independence
|-------- | -------------------------------------------------------------------------

The information required by this Item as to certain business relationships and transactions with management and other related parties of the Company is hereby incorporated by reference to such information appearing under the captions
Certain Transactions with Related Persons, and Director Independence in the Companys definitive proxy to be filed with the SEC pursuant to the Exchange Act within 120 days of year end.



|ITEM 14. | Principal Accounting Fees and Services
|-------- | --------------------------------------

The information required by
this Item as to disclosures regarding accounting fees and services is hereby incorporated by reference to such information appearing under the caption Independent Registered Public Accounting Firms Fees in the Companys
definitive proxy to be filed with the SEC pursuant to the Exchange Act within 120 days of year end.

PART IV



|ITEM 15. | Exhibits, Financial Statement Schedules
|-------- | ---------------------------------------

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



| | 1. | Consolidated Financial Statements. The following Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm are included in this
Annual Report on Form 10-K.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                        |  |    
|------------------------------------------------------- |  | ---
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |  | F-2
|                                                        | 
|CONSOLIDATED FINANCIAL STATEMENTS:                      |  |    
|Consolidated Balance Sheets                             |  | F-3
|Consolidated Statements of Income                       |  | F-4
|Consolidated Statements of Shareholders Equity         |  | F-5
|Consolidated Statements of Cash Flows                   |  | F-6
|Notes to Consolidated Financial Statements              |  | F-7



| | 2. | Consolidated Financial Statement Schedules. These schedules are omitted as the required information is inapplicable or the information is presented in the consolidated
financial statements or related notes.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Exhibits.
| | -- | ---------



|            |  |                                                                                                                                                                                                                                                                                        
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                        
|2.1         |  | 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).]          
|            | 
|2.2         |  | 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).]   
|            | 
|2.3         |  | 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).]
|            | 
|2.4         |  | 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).] 



41



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|            |  |                                                                                                                                                                                                                                                                                                                                          
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                                          
|2.5         |  | 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).]
|            | 
|2.6         |  | Purchase and Assumption Agreement dated as of October 29, 2002 between Sterling Bank Inc. and South Texas National Bank of Laredo. [Incorporated by reference to Exhibit 2.9 of the
Companys Annual Report on Form 10-K (File No. 000-20750).]                                                                                          
|            | 
|2.7         |  | Stock Purchase Agreement dated as of July 16, 2003 by and among Sterling Bancshares, Inc., Sterling Bank, CMCR Holding Company and RBC Mortgage Company. [Incorporated by reference to
Exhibit 2.1 to the Companys Current Form 8-K filed on October 15, 2003 (File No. 000-20750).]                                                    
|            | 
|2.8         |  | Amendment No. 1 to Stock Purchase Agreement dated as of September 30, 2003 by and among Sterling Bancshares, Inc., Sterling Bank, CMCR Holding Company and RBC Mortgage Company. [Incorporated
by reference to Exhibit 2.2 to the Companys Current Form 8-K filed on October 15, 2003 (File No. 000-20750).]                            
|            | 
|2.9         |  | Agreement and Plan of Merger dated August 18, 2003 by and among Sterling Bancshares, Inc., SB 2003, Inc. and South Texas Capital Group, Inc. [Incorporated by reference to Exhibit 10.3 of the
Companys Quarterly Report on Form 10-Q filed on November 14, 2003 (File No. 000-20750).]                                                 
|            | 
|2.10        |  | Agreement and Plan of Merger Dated July 7, 2005 by and among Sterling Bancshares, Inc., SBPB, Inc., and Prestonwood Bancshares, Inc. [Incorporated by reference to Exhibit 10.1 of the
Companys Quarterly Report on Form 10-Q filed on November 8, 2005 (File No. 000-20750).]                                                          
|            | 
|2.11        |  | Agreement and Plan of Merger dated July 25, 2006 between Sterling Bancshares, Inc. and BOTH, Inc. [Incorporated by reference to Exhibit 2.1 of the Companys Current Report on Form 8-K
filed on July 26, 2006.]                                                                                                                         
|            | 
|2.12        |  | Agreement and Plan of Merger dated January 24, 2007 between Sterling Bancshares, Inc., Sterling Bank and Partners Bank of Texas. [Incorporated by reference to Exhibit 2.1 of the
Companys Current Report on Form 8-K filed on January 25, 2007.]                                                                                       
|            | 
|2.13        |  | Share Exchange Agreement dated May 3, 2007, among the Company, MBM Advisors and the shareholders of MBM Advisors. [Incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on May 4, 2007 (File No. 000-20750).]                                                                                      
|            | 
|3.1         |  | Restated and Amended Articles of Incorporation of the Company effective August 13, 2007. [Incorporated by reference to Exhibit 3.1 of the Companys current report on Form 8-K filed on
August 19, 2007 (File No. 000-20750).]                                                                                                           
|            | 
|3.2         |  | Amended and Restated Bylaws of Sterling Bancshares, Inc. (as of October 29, 2007). [Incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed on October
30, 2007 (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 Current Report on Form 8-K filed on March 21, 2001 (File
No. 000-20750).]                                                                                                                                      



42



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                                                                              
|4.2         |  | Indenture dated March 21, 2001. [Incorporated by reference to Exhibit 4.4 of the Companys Current 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 Current Report on Form 8-K filed on March 21, 2001 (File No. 000-20750).]                                                                                                                                                                                      
|            | 
|4.4         |  | 9.20% Subordinated Deferrable Interest Debenture due March 21, 2031. [Incorporated by reference to Exhibit 4.7 of the Companys Current 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 Current 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 Current 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 Current 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 Current 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 Current 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 Current Report on Form 8-K dated September 26,
2002 (File No. 000-20750).]                                                                                                                                                        
|            | 
|4.11        |  | Fiscal and Paying Agency Agreement dated April 10, 2003 between Sterling Bank and Deutsche Bank Trust Company Americas. [Incorporated by reference to Exhibit 4.1 of the Companys Current
Report on Form 8-K filed April 15, 2003 (File No. 000-20750).]                                                                                                                    
|            | 
|4.12        |  | Form of Global Certificate representing Sterling Banks 7.375% Subordinated Notes due 2013. [Incorporated by reference to Exhibit 4.2 of the Companys Current Report on Form 8-K
filed April 15, 2003 (File No. 000-20750).]                                                                                                                                                
|            | 
|4.13        |  | Amended and Restated Declaration of Trust by and among Sterling Bancshares, Inc., as sponsor, Wilmington Trust Company, as institutional trustee and Delaware trustee, and the administrators
named therein, dated as of March 26, 2007. [Incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed on March 30, 2007 (File No. 000-20750).]
|            | 
|4.14        |  | Indenture by and between Sterling Bancshares, Inc., as issuer, and Wilmington Trust Company, as trustee, dated as of March 26, 2007. [Incorporated by reference to Exhibit 4.2 to the
Companys Current Report on Form 8-K filed on March 30, 2007 (File No. 000-20750).]                                                                                                    



43



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|            |  |                                                                                                                                                                                                                                                                                                                       
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                       
|4.15        |  | Guarantee Agreement by and between Sterling Bancshares, Inc., as guarantor, and Wilmington Trust Company, as guarantee trustee, dated as of March 26, 2007. [Incorporated by reference to
Exhibit 4.3 to the Companys Current Report on Form 8-K filed on March 30, 2007 (File No. 000-20750).]                      
|            | 
|4.16        |  | Form of Capital Securities Certificate of Sterling Bancshares Capital Trust IV, dated March 26, 2007. [Incorporated by reference to Exhibit 4.4 to the Companys Current Report on Form
8-K filed on March 30, 2007 (File No. 000-20750).]                                                                            
|            | 
|4.17        |  | Sterling Bancshares, Inc. Deferred Compensation Plan (as Amended and Restated) [Incorporated by reference to Exhibit 4.6 to the Companys Registration Statement on Form S-8
filed August 29, 2007 (File No. 333-145774 ).]                                                                                           
|            | 
|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 October 1, 2004 made by and between Sterling Bancshares, Inc. and Wells Fargo Bank, National Association regarding a line of credit in the amount of $20,000,000.
[Incorporated by reference to Exhibit 10.5 of the Companys Annual Report on Form 10-K for the year ended December 31, 2005.]
|            | 
|10.6        |  | First Amendment to Credit Agreement dated as of March 8, 2005 by and between Sterling Bancshares, Inc. and Wells Fargo Bank, National Association. [Incorporated by reference to Exhibit 10.6
of the Companys Annual Report on Form 10-K for the year ended December 31, 2005.]                                      
|            | 
|10.7        |  | Second Amendment to Credit Agreement between Sterling Bancshares, Inc. and Wells Fargo Bank, National Association, dated September 29, 2005. [Incorporated by reference to Exhibit 10.1 of the
Companys Report on Form 8-K filed on October 5, 2005 (File No. 000-207500).]                                          
|            | 
|10.8***     |  | Employment Agreement between Sterling Bancshares, Inc. and J. Downey Bridgwater executed on December 20, 2007, and effective as of January 1, 2007. [Incorporated by reference to Exhibit 10.1
of the Companys Report on Form 8-K filed on December 26, 2007 (File No. 000-207500).]                                 
|            | 
|10.11***    |  | Amended and restated Sterling Bancshares, Inc. 2003 Stock Incentive and Compensation Plan effective April 30, 2007. [Incorporated by reference to Exhibit 10.1 of the Companys current
report on Form 8-K filed on August 14, 2007. (File No. 000-207500).]                                                          



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|            |     |  |                                                                                                                                                                                                                                                                                  |  |                  
|----------- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------
|Exhibit No. |     |  |                                                                                                                                                                                                                                                                                  |  |                  
|10.12       | *** |  | Consulting Agreement between Sterling Bancshares, Inc. and George Martinez executed on June 9, 2004, and effective as of June 1, 2004. [Incorporated by reference to
Exhibit 10.1 of the Companys Quarterly Report on Form 10-Q filed on August 5, 2004 (File No. 000-207501)].
|            |    
|10.13       | *** |  | Amendment to Employment and Consulting Agreement between Sterling Bancshares, Inc. and George Martinez dated December 22, 2005. [Incorporated by reference to Exhibit 10.1 of the
Companys Report on Form 8-K filed on December 27, 2005 (File No. 000-207500).]               
|            |    
|10.14       | *** |  | Form of Severance and Non-Competition Agreements between Sterling Bancshares, Inc., Sterling Bank and the following named executive officers:                                                                                                                                   
|            |     | 
|            |     |  | Wanda S. Dalton                                                                                                                                                                                                                                                                  |  | Travis Jaggers   
|            |     |  | James W. Goolsby, Jr.                                                                                                                                                                                                                                                            |  | Graham B. Painter
|            |    
|            |     |  | [Incorporated by reference to Exhibit 10.2 of the Companys Quarterly Report on Form 10-Q filed on August 5, 2004 (File No. 000-207501).]                                                                                                                                       

|      |     |  |                                                                                                                                                                                                                                                                                                 
|----- | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |    
|10.15 | *** |  | Form of Restricted Stock Agreement. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on February 4, 2005
(File No. 000-207500).]                                                                                                                    
|      |    
|10.16 | *** |  | Form of Incentive Stock Agreement. [Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K filed on February 4, 2005
(File No. 000-207500).]                                                                                                                     
|      |    
|10.17 | *** |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc., Sterling Bank and Allen Brown executed and effective as of December 1, 2004. [Incorporated by reference to Exhibit
10.1 of the Companys Current Report on Form 8-K filed on December 7, 2004 (File No. 000-207500).]
|      |    
|10.18 | *** |  | Short Term Incentive Program for Shared Services. [Incorporated by reference to Exhibit 10.14 of the Companys Annual Report on Form 10-K for the year ended December 31,
2004.]                                                                                                                
|      |    
|10.19 | *** |  | Short Term Incentive Program for Bank Offices. [Incorporated by reference to Exhibit 10.15 of the Companys Annual Report on Form 10-K for the year ended December 31,
2004.]                                                                                                                   
|      |    
|10.20 | *** |  | Severance and Non-Competition Agreement dated effective May 2, 2005, by and among Sterling Bancshares, Inc., Sterling Bank and Sonny B. Lyles. [Incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on May 5, 2005 (File No. 000-207500).]              
|      |    
|10.21 | *** |  | Severance and Non-Competition Agreement dated effective January 1, 2005, by and among Sterling Bancshares, Inc., Sterling Bank and Robert S. Smith. [Incorporated by reference to Exhibit 10.1
of the Companys Current Report on Form 8-K filed on January 13, 2005 (File No. 000-207500).]    
|      |    
|10.22 | *** |  | Non-Compete Agreement between Sterling Bancshares, Inc. and Max W. Wells dated July 7, 2005. [Incorporated by reference to Exhibit 10.2 of the Companys Quarterly Report on Form 10-Q
filed on November 8, 2005 (File No. 000-207500).]                                                        



45



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##### Index to Financial Statements

|            |     |  |                                                                                                                                                                                                                                                                   
|----------- | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |     |  |                                                                                                                                                                                                                                                                   
|10.23       | *** |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc. and John A. Rossitto dated January 23, 2006. [Incorporated by reference to Exhibit 10.1 of the Companys
Current Report on Form 8-K filed on January 26, 2006 (File No. 000-207500).]   
|            |    
|10.24       | *** |  | Summary Description of Non-Employee Director compensation. [Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K filed on April 29, 2005 (File No.
000-207500).]                                                                 
|            |    
|10.25       | *** |  | Summary of Named Executive Officer Compensation. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on April 29, 2005 (File No. 000-207500).]                                                                           
|            |    
|10.26       | *** |  | Summary Description of Compensation - Sonny B. Lyles. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on May 2, 2005 (File No.
000-207500).]                                                                         
|            |    
|10.27       |     |  | Purchase and Sale Agreement, dated November 13, 2006, between Sterling Bank and First States Group, L.P. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on
Form 8-K filed on November 17, 2006.]                                      
|            |    
|10.28       | *** |  | Phantom Share Agreement dated August 9, 2006 between Sterling Bancshares, Inc. and Stephen C. Raffaele. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form
8-K filed on August 15, 2006.]                                         
|            |    
|10.29       | *** |  | Phantom Share Agreement dated August 9, 2006 between Sterling Bancshares, Inc. and Stephen C. Raffaele. [Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form
8-K filed on August 15, 2006].                                         
|            |    
|10.30       | *** |  | Phantom Share Agreement dated August 9, 2006 between Sterling Bancshares, Inc. and Sonny B. Lyles. [Incorporated by reference to Exhibit 10.3 of the Companys Current Report on Form 8-K
filed on August 15, 2006].                                              
|            |    
|10.31       | *** |  | Phantom Share Agreement dated August 9, 2006 between Sterling Bancshares, Inc. and Allen D. Brown. [Incorporated by reference to Exhibit 10.4 of the Companys Current Report on Form
8-K filed on August 15, 2006].                                              
|            |    
|10.32       | *** |  | Phantom Share Agreement dated August 9, 2006 between Sterling Bancshares, Inc. and Allen D. Brown. [Incorporated by reference to Exhibit 10.5 of the Companys Current Report on Form 8-K
filed on August 15, 2006.]                                              
|            |    
|10.33       | *** |  | Form of Phantom Share Agreement. [Incorporated by reference to Exhibit 10.6 of the Companys Current Report on Form 8-K filed on August 15, 2006.]                                                                                                                
|            |    
|10.34       | *** |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc., a Texas corporation, and Deborah Dinsmore, dated February 24, 2006. [Incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on February 28, 2006.]
|            |    
|10.35       | *** |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc., a Texas corporation, and C. Wallis McMath, Jr., dated March 1, 2006. [Incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on March 6, 2006.]   
|            |    
|10.36       | *** |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc., a Texas corporation, and Zach L. Wasson dated December 4, 2006. [Incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on December 6, 2006.]     



46



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                                                                                                                        
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.37       |  | Placement Agreement by and among Sterling Bancshares, Inc., Sterling Bancshares Capital Trust IV, FTN Financial Capital Markets and Keefe, Bruyette & Woods, Inc., dated March 14, 2007.
[Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on March 30, 2007 (File No. 000-20750).]                                         
|            | 
|10.38       |  | Amendment to Severance and Non-Competition Agreement between Sterling Bancshares, Inc., a Texas corporation, Sterling Bank, a banking association chartered by the State of Texas, and Stephen
C. Raffaele effective June 29, 2007. [Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on July 2, 2007 (File No. 000-20750).]
|            | 
|10.39       |  | Long-Term Incentive (LTI) Stock Performance Program [Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on September 5. 2007 (File No.
000-20750).]                                                                                                                                                                           
|            | 
|21.1*       |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                           
|            | 
|23.1*       |  | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                                                       
|            | 
|31.1*       |  | Certification of J. Downey Bridgwater, Chairman, President and Chief Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                         
|            | 
|31.2*       |  | Certification of Zach L. Wasson, 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 furnished herewith.
|-- | ----------------------

|*** | Management Compensation Agreement
|--- | ---------------------------------



47



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##### Index to Financial Statements

SIGNATURES

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



|                        |  |  |  |                           |  |                             |  |                                                                     
|----------------------- |  |  |  | ------------------------- |  | --------------------------- |  | --------------------------------------------------------------------
|                        |  |  |  | STERLING BANCSHARES, INC.
|                        |  |  | 
|DATE: February 29, 2008 |  |  |  | by                        |  | /S/    J. DOWNEY
BRIDGWATER
|                        |  |  |  |                           |  |                             |  | J. Downey Bridgwater Chairman, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacity indicated on this the 29th day of February, 2008.



|                                                             |  |                                                                                                   |  |                                              |  |         
|------------------------------------------------------------ |  | ------------------------------------------------------------------------------------------------- |  | -------------------------------------------- |  | --------
|SIGNATURE                                                    |  | TITLE                                                                                             |  | SIGNATURE                                    |  | TITLE   
|                                                             |  |                                                                                                   | 
|/s/    J. DOWNEY
BRIDGWATER J. Downey Bridgwater             |  | Chairman, President, and Chief Executive Officer (Principal Executive Officer)                    |  | /s/    GLENN H.
JOHNSON Glenn H. Johnson     |  | Director
|                                                             |  |                                                                                                   | 
|/s/    ZACH L.
WASSON Zach L. Wasson                         |  | Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |  | /s/    R. BRUCE
LABOON R. Bruce LaBoon       |  | Director
|                                                             |  |                                                                                                   | 
|/s/    DAVID L.
HATCHER David L. Hatcher                     |  | Lead Director                                                                                     |  | /s/    G. EDWARD
POWELL G. Edward Powell     |  | Director
|                                                             |  |                                                                                                   | 
|/s/    EDWARD R.
BARDGETT Edward R. Bardgett                 |  | Director                                                                                          |  | /s/    RAIMUNDO
RIOJAS E. Raimundo Riojas E. |  | Director
|                                                             |  |                                                                                                   | 
|/s/    GEORGE BEATTY,
JR. George Beatty, Jr.                 |  | Director                                                                                          |  | /s/    ROLAND
RODRIGUEZ Roland Rodriguez     |  | Director
|                                                             |  |                                                                                                   | 
|/s/    ANAT BIRD Anat Bird                                   |  | Director                                                                                          |  | /s/    DAN C.
TUTCHER Dan C. Tutcher         |  | Director
|                                                             |  |                                                                                                   | 
|/s/    BRUCE J.
HARPER Bruce J. Harper                       |  | Director                                                                                          |  | /s/    MAX W.
WELLS Max W. Wells             |  | Director
|                                                             |  |                                                                                                   | 
|/s/    BERNARD A. HARRIS, JR.,
MD Bernard A. Harris, Jr., MD |  | Director                                                                                          |  |                                              |  |         



48



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##### Index to Financial Statements

EXHIBIT TABLE



|            |  |                                                                                                                                                                                                                                                                                                                                          
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                                          
|2.1         |  | 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).]                                                            
|            | 
|2.2         |  | 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).]                                                     
|            | 
|2.3         |  | 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).]                                                  
|            | 
|2.4         |  | 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).]                                                   
|            | 
|2.5         |  | 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).]
|            | 
|2.6         |  | Purchase and Assumption Agreement dated as of October 29, 2002 between Sterling Bank Inc. and South Texas National Bank of Laredo. [Incorporated by reference to Exhibit 2.9 of the
Companys Annual Report on Form 10-K (File No. 000-20750).]                                                                                          
|            | 
|2.7         |  | Stock Purchase Agreement dated as of July 16, 2003 by and among Sterling Bancshares, Inc., Sterling Bank, CMCR Holding Company and RBC Mortgage Company. [Incorporated by reference to Exhibit
2.1 to the Companys Current Form 8-K filed on October 15, 2003 (File No. 000-20750).]                                                    
|            | 
|2.8         |  | Amendment No. 1 to Stock Purchase Agreement dated as of September 30, 2003 by and among Sterling Bancshares, Inc., Sterling Bank, CMCR Holding Company and RBC Mortgage Company. [Incorporated
by reference to Exhibit 2.2 to the Companys Current Form 8-K filed on October 15, 2003 (File No. 000-20750).]                            
|            | 
|2.9         |  | Agreement and Plan of Merger dated August 18, 2003 by and among Sterling Bancshares, Inc., SB 2003, Inc. and South Texas Capital Group, Inc. [Incorporated by reference to Exhibit 10.3 of the
Companys Quarterly Report on Form 10-Q filed on November 14, 2003 (File No. 000-20750).]                                                 
|            | 
|2.10        |  | Agreement and Plan of Merger Dated July 7, 2005 by and among Sterling Bancshares, Inc., SBPB, Inc., and Prestonwood Bancshares, Inc. [Incorporated by reference to Exhibit 10.1 of the
Companys Quarterly Report on Form 10-Q filed on November 8, 2005 (File No. 000-20750).]                                                          
|            | 
|2.11        |  | Agreement and Plan of Merger dated July 25, 2006 between Sterling Bancshares, Inc. and BOTH, Inc. [Incorporated by reference to Exhibit 2.1 of the Companys Current Report on Form 8-K
filed on July 26, 2006.]                                                                                                                         
|            | 
|2.12        |  | Agreement and Plan of Merger dated January 24, 2007 between Sterling Bancshares, Inc., Sterling Bank and Partners Bank of Texas. [Incorporated by reference to Exhibit 2.1 of the
Companys Current Report on Form 8-K filed on January 25, 2007.]                                                                                       
|            | 
|2.13        |  | Share Exchange Agreement dated May 3, 2007, among the Company, MBM Advisors and the shareholders of MBM Advisors. [Incorporated by reference to Exhibit 2.1 to the Companys Current
Report on Form 8-K filed on May 4, 2007 (File No. 000-20750).]                                                                                      



49



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                                                                                                                              
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                                                                              
|3.1         |  | Restated and Amended Articles of Incorporation of the Company effective August 13, 2007. [Incorporated by reference to Exhibit 3.1 of the Companys current report on Form 8-K filed on
August 19, 2007 (File No. 000-20750).]                                                                                                                                               
|            | 
|3.2         |  | Amended and Restated Bylaws of Sterling Bancshares, Inc. (as of October 29, 2007). [Incorporated by reference to Exhibit 3.1 of the Companys Current Report on Form 8-K filed on October
30, 2007 (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 Current 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 Current 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 Current Report on Form 8-K filed on March 21, 2001 (File No. 000-20750).]                                                                                                                                                                                      
|            | 
|4.4         |  | 9.20% Subordinated Deferrable Interest Debenture due March 21, 2031. [Incorporated by reference to Exhibit 4.7 of the Companys Current 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 Current 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 Current 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 Current 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 Current 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 Current 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 Current Report on Form 8-K dated September 26,
2002 (File No. 000-20750).]                                                                                                                                                        
|            | 
|4.11        |  | Fiscal and Paying Agency Agreement dated April 10, 2003 between Sterling Bank and Deutsche Bank Trust Company Americas. [Incorporated by reference to Exhibit 4.1 of the Companys
Current Report on Form 8-K filed April 15, 2003 (File No. 000-20750).]                                                                                                                    
|            | 
|4.12        |  | Form of Global Certificate representing Sterling Banks 7.375% Subordinated Notes due 2013. [Incorporated by reference to Exhibit 4.2 of the Companys Current Report on Form 8-K
filed April 15, 2003 (File No. 000-20750).]                                                                                                                                                
|            | 
|4.13        |  | Amended and Restated Declaration of Trust by and among Sterling Bancshares, Inc., as sponsor, Wilmington Trust Company, as institutional trustee and Delaware trustee, and the administrators
named therein, dated as of March 26, 2007. [Incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed on March 30, 2007 (File No. 000-20750).]



50



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                                                                       
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                       
|4.14        |  | Indenture by and between Sterling Bancshares, Inc., as issuer, and Wilmington Trust Company, as trustee, dated as of March 26, 2007. [Incorporated by reference to Exhibit 4.2 to the
Companys Current Report on Form 8-K filed on March 30, 2007 (File No. 000-20750).]                                             
|            | 
|4.15        |  | Guarantee Agreement by and between Sterling Bancshares, Inc., as guarantor, and Wilmington Trust Company, as guarantee trustee, dated as of March 26, 2007. [Incorporated by reference to
Exhibit 4.3 to the Companys Current Report on Form 8-K filed on March 30, 2007 (File No. 000-20750).]                      
|            | 
|4.16        |  | Form of Capital Securities Certificate of Sterling Bancshares Capital Trust IV, dated March 26, 2007. [Incorporated by reference to Exhibit 4.4 to the Companys Current Report on Form
8-K filed on March 30, 2007 (File No. 000-20750).]                                                                            
|            | 
|4.17        |  | Sterling Bancshares, Inc. Deferred Compensation Plan (as Amended and Restated) [Incorporated by reference to Exhibit 4.6 to the Companys Registration Statement on Form S-8
filed August 29, 2007 (File No. 333-145774 ).]                                                                                           
|            | 
|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 October 1, 2004 made by and between Sterling Bancshares, Inc. and Wells Fargo Bank, National Association regarding a line of credit in the amount of $20,000,000.
[Incorporated by reference to Exhibit 10.5 of the Companys Annual Report on Form 10-K for the year ended December 31, 2005.]
|            | 
|10.6        |  | First Amendment to Credit Agreement dated as of March 8, 2005 by and between Sterling Bancshares, Inc. and Wells Fargo Bank, National Association. [Incorporated by reference to Exhibit 10.6
of the Companys Annual Report on Form 10-K for the year ended December 31, 2005.]                                      
|            | 
|10.7        |  | Second Amendment to Credit Agreement between Sterling Bancshares, Inc. and Wells Fargo Bank, National Association, dated September 29, 2005. [Incorporated by reference to Exhibit 10.1 of
the Companys Report on Form 8-K filed on October 5, 2005 (File No. 000-207500).]                                          
|            | 
|10.8***     |  | Employment Agreement between Sterling Bancshares, Inc. and J. Downey Bridgwater executed on December 20, 2007, and effective as of January 1, 2007. [Incorporated by reference to
Exhibit 10.1 of the Companys Report on Form 8-K filed on December 26, 2007 (File No. 000-207500).]                                 
|            | 
|10.11***    |  | Amended and restated Sterling Bancshares, Inc. 2003 Stock Incentive and Compensation Plan effective April 30, 2007. [Incorporated by reference to Exhibit 10.1 of the Companys current
report on Form 8-K filed on August 14, 2007. (File No. 000-207500).]                                                          
|            | 
|10.12***    |  | Consulting Agreement between Sterling Bancshares, Inc. and George Martinez executed on June 9, 2004, and effective as of June 1, 2004. [Incorporated by reference to Exhibit 10.1 of the
Companys Quarterly Report on Form 10-Q filed on August 5, 2004 (File No. 000-207501)].                                      



51



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                  
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                  
|10.13***    |  | Amendment to Employment and Consulting Agreement between Sterling Bancshares, Inc. and George Martinez dated December 22, 2005. [Incorporated by reference to Exhibit 10.1 of the
Companys Report on Form 8-K filed on December 27, 2005 (File No. 000-207500).]
|            | 
|10.14***    |  | Form of Severance and Non-Competition Agreements between Sterling Bancshares, Inc., Sterling Bank and the following named executive officers:                                                                                                                    

| |  |                       |  |                  
| |  | --------------------- |  | -----------------
| |  |                      
| |  | Wanda S. Dalton       |  | Travis Jaggers   
| |  | James W. Goolsby, Jr. |  | Graham B. Painter

|      |     |  |                                                                                                                                                                                                                                                                                                 
|----- | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |    
|      |     |  | [Incorporated by reference to Exhibit 10.2 of the Companys Quarterly Report on Form 10-Q filed on August 5, 2004 (File No. 000-207501).]                                                                                                                                                       
|      |    
|10.15 | *** |  | Form of Restricted Stock Agreement. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on February 4, 2005 (File No.
000-207500).]                                                                                                                    
|      |    
|10.16 | *** |  | Form of Incentive Stock Agreement. [Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K filed on February 4, 2005 (File No.
000-207500).]                                                                                                                     
|      |    
|10.17 | *** |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc., Sterling Bank and Allen Brown executed and effective as of December 1, 2004. [Incorporated by reference to
Exhibit 10.1 of the Companys Current Report on Form 8-K filed on December 7, 2004 (File No. 000-207500).]
|      |    
|10.18 | *** |  | Short Term Incentive Program for Shared Services. [Incorporated by reference to Exhibit 10.14 of the Companys Annual Report on Form 10-K for the year ended December 31,
2004.]                                                                                                                
|      |    
|10.19 | *** |  | Short Term Incentive Program for Bank Offices. [Incorporated by reference to Exhibit 10.15 of the Companys Annual Report on Form 10-K for the year ended December 31,
2004.]                                                                                                                   
|      |    
|10.20 | *** |  | Severance and Non-Competition Agreement dated effective May 2, 2005, by and among Sterling Bancshares, Inc., Sterling Bank and Sonny B. Lyles. [Incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on May 5, 2005 (File No. 000-207500).]              
|      |    
|10.21 | *** |  | Severance and Non-Competition Agreement dated effective January 1, 2005, by and among Sterling Bancshares, Inc., Sterling Bank and Robert S. Smith. [Incorporated by reference to Exhibit 10.1
of the Companys Current Report on Form 8-K filed on January 13, 2005 (File No. 000-207500).]    
|      |    
|10.22 | *** |  | Non-Compete Agreement between Sterling Bancshares, Inc. and Max W. Wells dated July 7, 2005. [Incorporated by reference to Exhibit 10.2 of the Companys Quarterly Report on
Form 10-Q filed on November 8, 2005 (File No. 000-207500).]                                                        
|      |    
|10.23 | *** |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc. and John A. Rossitto dated January 23, 2006. [Incorporated by reference to Exhibit 10.1 of the Companys Current
Report on Form 8-K filed on January 26, 2006 (File No. 000-207500).]                                 
|      |    
|10.24 | *** |  | Summary Description of Non-Employee Director compensation. [Incorporated by reference to Exhibit 10.2 of the Companys Current Report on Form 8-K filed on April 29, 2005
(File No. 000-207500).]                                                                                               
|      |    
|10.25 | *** |  | Summary of Named Executive Officer Compensation. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on April 29, 2005 (File No. 000-207500).]                                                                                                         



52



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##### Index to Financial Statements

|            |  |                                                                                                                                                                                                                                                                                                                                                                        
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                                                                                                                                                                                                                                        
|10.26***    |  | Summary Description of Compensation - Sonny B. Lyles. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on Form 8-K filed on May 2, 2005
(File No. 000-207500).]                                                                                                                                                                              
|            | 
|10.27       |  | Purchase and Sale Agreement, dated November 13, 2006, between Sterling Bank and First States Group, L.P. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on
Form 8-K filed on November 17, 2006.]                                                                                                                                           
|            | 
|10.28***    |  | Phantom Share Agreement dated August 9, 2006 between Sterling Bancshares, Inc. and Stephen C. Raffaele. [Incorporated by reference to Exhibit 10.1 of the Companys Current Report on
Form 8-K filed on August 15, 2006.]                                                                                                                                              
|            | 
|10.29***    |  | Phantom Share Agreement dated August 9, 2006 between Sterling Bancshares, Inc. and Stephen C. Raffaele. [Incorporated by reference to Exhibit 10.2 of the Companys Current Report on
Form 8-K filed on August 15, 2006].                                                                                                                                              
|            | 
|10.30***    |  | Phantom Share Agreement dated August 9, 2006 between Sterling Bancshares, Inc. and Sonny B. Lyles. [Incorporated by reference to Exhibit 10.3 of the Companys Current Report on Form 8-K
filed on August 15, 2006].                                                                                                                                                   
|            | 
|10.31***    |  | Phantom Share Agreement dated August 9, 2006 between Sterling Bancshares, Inc. and Allen D. Brown. [Incorporated by reference to Exhibit 10.4 of the Companys Current Report on Form
8-K filed on August 15, 2006].                                                                                                                                                   
|            | 
|10.32***    |  | Phantom Share Agreement dated August 9, 2006 between Sterling Bancshares, Inc. and Allen D. Brown. [Incorporated by reference to Exhibit 10.5 of the Companys Current Report on Form
8-K filed on August 15, 2006.]                                                                                                                                                   
|            | 
|10.33***    |  | Form of Phantom Share Agreement. [Incorporated by reference to Exhibit 10.6 of the Companys Current Report on Form 8-K filed on August 15, 2006.]                                                                                                                                                                                                                     
|            | 
|10.34***    |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc., a Texas corporation, and Deborah Dinsmore, dated February 24, 2006. [Incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on February 28, 2006.]                                                                                                     
|            | 
|10.35***    |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc., a Texas corporation, and C. Wallis McMath, Jr., dated March 1, 2006. [Incorporated by reference to Exhibit 10.1 of
the Companys Current Report on Form 8-K filed on March 6, 2006.]                                                                                                        
|            | 
|10.36***    |  | Severance and Non-Competition Agreement between Sterling Bancshares, Inc., a Texas corporation, and Zach L. Wasson dated December 4, 2006. [Incorporated by reference to Exhibit 10.1
of the Companys Current Report on Form 8-K filed on December 6, 2006.]                                                                                                          
|            | 
|10.37       |  | Placement Agreement by and among Sterling Bancshares, Inc., Sterling Bancshares Capital Trust IV, FTN Financial Capital Markets and Keefe, Bruyette & Woods, Inc., dated March 14,
2007. [Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on March 30, 2007 (File No. 000-20750).]                                         
|            | 
|10.38       |  | Amendment to Severance and Non-Competition Agreement between Sterling Bancshares, Inc., a Texas corporation, Sterling Bank, a banking association chartered by the State of Texas, and Stephen
C. Raffaele effective June 29, 2007. [Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on July 2, 2007 (File No. 000-20750).]
|            | 
|10.39       |  | Long-Term Incentive (LTI) Stock Performance Program [Incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed on September 5. 2007
(File No. 000-20750).]                                                                                                                                                                           



53



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##### Index to Financial Statements

|            |  |                                                                                                                                                               
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  |                                                                                                                                                               
|21.1*       |  | Subsidiaries of the Company.                                                                                                                                  
|            | 
|23.1*       |  | Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.                                                                              
|            | 
|31.1*       |  | Certification of J. Downey Bridgwater, Chairman, President and Chief Executive Officer, as required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|            | 
|31.2*       |  | Certification of Zach L. Wasson, 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 furnished herewith.
|-- | ----------------------

|*** | Management Compensation Agreement
|--- | ---------------------------------



54



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##### Index to Financial Statements

STERLING BANCSHARES, INC.

TABLE OF CONTENTS



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|                                                        | 
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |  | F-2 
|                                                        | 
|CONSOLIDATED FINANCIAL STATEMENTS:                      |  |     
|                                                        | 
|Consolidated Balance Sheets                             |  | F-3 
|                                                        | 
|Consolidated Statements of Income                       |  | F-4 
|                                                        | 
|Consolidated Statements of Shareholders Equity         |  | F-5 
|                                                        | 
|Consolidated Statements of Cash Flows                   |  | F-6 
|                                                        | 
|Notes to Consolidated Financial Statements              |  | F-7 



F-1



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##### Table of Contents

##### Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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 Bank) as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholders equity, and cash flows for each
of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Banks management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 financial position of Sterling
Bancshares, Inc. and subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the Banks internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 28, 2008 expressed an unqualified opinion on the Banks internal control over financial reporting.

LOGO

Houston, Texas

February 28, 2008



F-2



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

(In thousands, except share amounts)



|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                                                                                                                                                                  |  | 2007 |           |   | 2006 |  
|ASSETS                                                                                                                                                                            |  |      |           |   |      |   |           |  
|Cash and cash equivalents                                                                                                                                                         |  | $    | 133,670   |   |      | $ | 134,775   |  
|Interest-bearing deposits in financial institutions                                                                                                                               |  |      |          |   |      |   | 198       |  
|Available-for-sale securities, at fair value                                                                                                                                      |  |      | 476,690   |   |      |   | 409,351   |  
|Held-to-maturity securities, at amortized cost                                                                                                                                    |  |      | 180,086   |   |      |   | 164,263   |  
|Loans held for sale                                                                                                                                                               |  |      | 78,447    |   |      |   | 54,722    |  
|Loans held for investment                                                                                                                                                         |  |      | 3,339,837 |   |      |   | 3,077,845 |  
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|Total loans                                                                                                                                                                       |  |      | 3,418,284 |   |      |   | 3,132,567 |  
|Allowance for loan losses                                                                                                                                                         |  |      | (34,446   | ) |      |   | (32,027   | )
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|Loans, net                                                                                                                                                                        |  |      | 3,383,838 |   |      |   | 3,100,540 |  
|Premises and equipment, net                                                                                                                                                       |  |      | 27,905    |   |      |   | 23,475    |  
|Real estate acquired by foreclosure                                                                                                                                               |  |      | 3,683     |   |      |   | 1,465     |  
|Goodwill                                                                                                                                                                          |  |      | 168,815   |   |      |   | 130,858   |  
|Core deposits and other intangibles, net                                                                                                                                          |  |      | 15,971    |   |      |   | 10,299    |  
|Accrued interest receivable                                                                                                                                                       |  |      | 19,701    |   |      |   | 18,692    |  
|Other assets                                                                                                                                                                      |  |      | 125,550   |   |      |   | 123,643   |  
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|TOTAL ASSETS                                                                                                                                                                      |  | $    | 4,535,909 |   |      | $ | 4,117,559 |  
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                              |  |      |           |   |      |   |           |  
|LIABILITIES:                                                                                                                                                                      |  |      |           |   |      |   |           |  
|Deposits:                                                                                                                                                                         |  |      |           |   |      |   |           |  
|Noninterest-bearing demand                                                                                                                                                        |  | $    | 1,092,210 |   |      | $ | 1,058,135 |  
|Interest-bearing demand                                                                                                                                                           |  |      | 1,403,227 |   |      |   | 1,229,313 |  
|Certificates and other time                                                                                                                                                       |  |      | 1,178,274 |   |      |   | 1,047,163 |  
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|Total deposits                                                                                                                                                                    |  |      | 3,673,711 |   |      |   | 3,334,611 |  
|Other borrowed funds                                                                                                                                                              |  |      | 197,147   |   |      |   | 220,675   |  
|Subordinated debt                                                                                                                                                                 |  |      | 48,694    |   |      |   | 46,135    |  
|Junior subordinated debt                                                                                                                                                          |  |      | 82,734    |   |      |   | 56,959    |  
|Accrued interest payable and other liabilities                                                                                                                                    |  |      | 53,364    |   |      |   | 49,894    |  
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|Total liabilities                                                                                                                                                                 |  |      | 4,055,650 |   |      |   | 3,708,274 |  
|                                                                                                                                                                                  |  |     
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                     |  |      |          |   |      |   |          |  
|                                                                                                                                                                                  |  |     
|SHAREHOLDERS EQUITY:                                                                                                                                                             |  |      |           |   |      |   |           |  
|Convertible preferred stock, $1 par value, 1,000,000 shares authorized, no shares issued and outstanding at December 31, 2006 and 2005                                            |  |      |          |   |      |   |          |  
|Common stock, $1 par value, 100,000,000 shares authorized, 74,926,449 and 71,938,175 issued and 73,158,949 and 71,000,675 outstanding at
December 31, 2007 and 2006, respectively |  |      | 74,926    |   |      |   | 71,938    |  
|Capital surplus                                                                                                                                                                   |  |      | 110,367   |   |      |   | 80,927    |  
|Retained earnings                                                                                                                                                                 |  |      | 309,903   |   |      |   | 272,179   |  
|Treasury stock, at cost, 1,767,500 and 937,500 shares held at December 31, 2007 and 2006, respectively                                                                            |  |      | (20,493   | ) |      |   | (10,902   | )
|Accumulated other comprehensive income/(loss), net of tax                                                                                                                         |  |      | 5,556     |   |      |   | (4,857    | )
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|Total shareholders equity                                                                                                                                                        |  |      | 480,259   |   |      |   | 409,285   |  
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                        |  | $    | 4,535,909 |   |      | $ | 4,117,559 |  
|                                                                                                                                                                                  |  |      |           |   |      |   |           |  

See notes to consolidated financial statements.



F-3



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

(In thousands, except per share amounts)



|                                                      |  |      |         |      |   |         |      |  |   |        
|----------------------------------------------------- |  | ---- | ------- | ---- | - | ------- | ---- |  | - | -------
|                                                      |  | 2007 |         | 2006 |   |         | 2005
|Interest income:                                      |  |      |         |      |   |         |      |  |   |        
|Loans, including fees                                 |  | $    | 260,101 |      | $ | 227,083 |      |  | $ | 175,521
|Securities:                                           |  |      |         |      |   |         |      |  |   |        
|Taxable                                               |  |      | 23,849  |      |   | 23,886  |      |  |   | 24,936 
|Non-taxable                                           |  |      | 3,494   |      |   | 2,622   |      |  |   | 2,442  
|Trading assets                                        |  |      | 173     |      |   | 696     |      |  |   | 1,318  
|Federal funds sold                                    |  |      | 597     |      |   | 261     |      |  |   | 293    
|Deposits in financial institutions                    |  |      | 35      |      |   | 183     |      |  |   | 93     
|                                                      |  |      |         |      |   |         |      |  |   |        
|Total interest income                                 |  |      | 288,249 |      |   | 254,731 |      |  |   | 204,603
|                                                      |  |      |         |      |   |         |      |  |   |        
|Interest expense:                                     |  |      |         |      |   |         |      |  |   |        
|Demand and savings deposits                           |  |      | 29,217  |      |   | 17,934  |      |  |   | 8,525  
|Certificates and other time deposits                  |  |      | 55,691  |      |   | 37,671  |      |  |   | 20,148 
|Other borrowed funds                                  |  |      | 6,829   |      |   | 17,273  |      |  |   | 15,102 
|Subordinated debt                                     |  |      | 4,649   |      |   | 4,476   |      |  |   | 3,665  
|Junior subordinated debt                              |  |      | 6,239   |      |   | 5,571   |      |  |   | 6,933  
|                                                      |  |      |         |      |   |         |      |  |   |        
|Total interest expense                                |  |      | 102,625 |      |   | 82,925  |      |  |   | 54,373 
|                                                      |  |      |         |      |   |         |      |  |   |        
|Net interest income                                   |  |      | 185,624 |      |   | 171,806 |      |  |   | 150,230
|Provision for credit losses                           |  |      | 3,820   |      |   | 4,058   |      |  |   | 14,371 
|                                                      |  |      |         |      |   |         |      |  |   |        
|Net interest income after provision for credit losses |  |      | 181,804 |      |   | 167,748 |      |  |   | 135,859
|                                                      |  |      |         |      |   |         |      |  |   |        
|Noninterest income:                                   |  |      |         |      |   |         |      |  |   |        
|Customer service fees                                 |  |      | 14,327  |      |   | 12,850  |      |  |   | 12,137 
|Net gain (loss) on trading assets                     |  |      | 2       |      |   | (302    | )    |  |   | 147    
|Net gain (loss) on sale of securities                 |  |      | 3       |      |   | (358    | )    |  |   | 60     
|Net gain on sale of loans                             |  |      | 1,991   |      |   | 1,326   |      |  |   | 1,455  
|Other                                                 |  |      | 19,897  |      |   | 17,701  |      |  |   | 13,160 
|                                                      |  |      |         |      |   |         |      |  |   |        
|Total noninterest income                              |  |      | 36,220  |      |   | 31,217  |      |  |   | 26,959 
|                                                      |  |      |         |      |   |         |      |  |   |        
|Noninterest expense:                                  |  |      |         |      |   |         |      |  |   |        
|Salaries and employee benefits                        |  |      | 81,039  |      |   | 76,046  |      |  |   | 61,229 
|Occupancy                                             |  |      | 18,366  |      |   | 16,075  |      |  |   | 15,556 
|Technology                                            |  |      | 8,843   |      |   | 6,882   |      |  |   | 5,524  
|Professional fees                                     |  |      | 4,159   |      |   | 6,147   |      |  |   | 6,527  
|Postage, delivery and supplies                        |  |      | 3,611   |      |   | 3,355   |      |  |   | 3,238  
|Marketing                                             |  |      | 1,809   |      |   | 2,412   |      |  |   | 2,306  
|Core deposits and other intangibles amortization      |  |      | 2,137   |      |   | 1,012   |      |  |   | 521    
|Acquisition costs                                     |  |      | 920     |      |   | 638     |      |  |   | 831    
|Other                                                 |  |      | 18,470  |      |   | 18,619  |      |  |   | 14,914 
|                                                      |  |      |         |      |   |         |      |  |   |        
|Total noninterest expense                             |  |      | 139,354 |      |   | 131,186 |      |  |   | 110,646
|                                                      |  |      |         |      |   |         |      |  |   |        
|Income before income taxes                            |  |      | 78,670  |      |   | 67,779  |      |  |   | 52,172 
|Provision for income taxes                            |  |      | 25,708  |      |   | 21,939  |      |  |   | 15,950 
|                                                      |  |      |         |      |   |         |      |  |   |        
|Net Income                                            |  | $    | 52,962  |      | $ | 45,840  |      |  | $ | 36,222 
|                                                      |  |      |         |      |   |         |      |  |   |        
|Earnings per share:                                   |  |      |         |      |   |         |      |  |   |        
|Basic                                                 |  | $    | 0.73    |      | $ | 0.67    |      |  | $ | 0.53   
|                                                      |  |      |         |      |   |         |      |  |   |        
|Diluted                                               |  | $    | 0.72    |      | $ | 0.66    |      |  | $ | 0.53   
|                                                      |  |      |         |      |   |         |      |  |   |        

See notes to consolidated financial statements.



F-4



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

(In thousands)



|                                                                                                             |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------ |  | --------------- |  | ------------ | - | ------ | -------------- | - | ------ | ---------------- | ------ | - | -------------- | - | ------- | ------------------------------------------ |  | ------ | ------- | - | ------ | ------ | - |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                             |  | Preferred Stock |  | Common Stock |   |        | CapitalSurplus |   |        | RetainedEarnings |        |   | Treasury Stock |   |         | AccumulatedOtherComprehensiveIncome/(Loss) |  |        | Total   |  
|                                                                                                             |  | Shares          |  | Amount       |   | Shares |                |   | Amount |                  |        |   |                |   |         |                                            |  | Shares |         |   | Amount |        |   |  |   |         |   | 
|BALANCE AT JANUARY 1, 2005                                                                                   |  |                |  | $            |  |        | 67,602         |   |        | $                | 67,602 |   |                | $ | 31,988  |                                            |  | $      | 213,814 |   |        |       |   |  | $ |        |   |  | $ | (232   | ) |  | $ | 313,172 |  
|Comprehensive income:                                                                                        |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                                                                   |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        | 36,222  |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 36,222  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of $3,628           |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   | (6,659 | ) |  |   | (6,659  | )
|Less: Reclassification adjustment for gains included in net income, net of taxes of $21                      |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   | (39    | ) |  |   | (39     | )
|                                                                                                             |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                   |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 29,524  |  
|                                                                                                             |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                                     |  |                 |  |              |   |        | 585            |   |        |                  | 585    |   |                |   | 4,040   |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 4,625   |  
|Repurchase of common stock                                                                                   |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        | (188   | ) |  |   | (1,984  | ) |  |   |        |   |  |   | (1,984  | )
|Cash dividends paid                                                                                          |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        | (10,865 | ) |        |        |   |  |   |         |   |  |   |        |   |  |   | (10,865 | )
|                                                                                                             |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2005                                                                                 |  |                |  |              |  |        | 68,187         |   |        |                  | 68,187 |   |                |   | 36,028  |                                            |  |        | 239,171 |   |        | (188   | ) |  |   | (1,984  | ) |  |   | (6,930 | ) |  |   | 334,472 |  
|Comprehensive income:                                                                                        |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                                                                   |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        | 45,840  |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 45,840  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of $24              |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   | 44     |   |  |   | 44      |  
|Net change in unrealized gains and losses on effective cash flow hedging derivatives, net of taxes of $967   |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   | 1,796  |   |  |   | 1,796   |  
|Less: Reclassification adjustment for losses included in net income, net of taxes of $125                    |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   | 233    |   |  |   | 233     |  
|                                                                                                             |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                   |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 47,913  |  
|                                                                                                             |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                                     |  |                 |  |              |   |        | 728            |   |        |                  | 728    |   |                |   | 6,951   |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 7,679   |  
|Issuance of common stock in connection with the purchase of BOTH, Inc.                                       |  |                 |  |              |   |        | 3,023          |   |        |                  | 3,023  |   |                |   | 37,948  |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 40,971  |  
|Repurchase of common stock                                                                                   |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        | (750   | ) |  |   | (8,918  | ) |  |   |        |   |  |   | (8,918  | )
|Cash dividends paid                                                                                          |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        | (12,832 | ) |        |        |   |  |   |         |   |  |   |        |   |  |   | (12,832 | )
|                                                                                                             |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2006                                                                                 |  |                |  |              |  |        | 71,938         |   |        |                  | 71,938 |   |                |   | 80,927  |                                            |  |        | 272,179 |   |        | (938   | ) |  |   | (10,902 | ) |  |   | (4,857 | ) |  |   | 409,285 |  
|Comprehensive income:                                                                                        |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Net income                                                                                                   |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        | 52,962  |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 52,962  |  
|Net change in unrealized gains and losses on available-for-sale securities, net of taxes of $2,641           |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   | 4,903  |   |  |   | 4,903   |  
|Net change in unrealized gains and losses on effective cash flow hedging derivatives, net of taxes of $2,967 |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   | 5,510  |   |  |   | 5,510   |  
|                                                                                                             |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Total comprehensive income                                                                                   |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 63,375  |  
|                                                                                                             |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|Issuance of common stock                                                                                     |  |                 |  |              |   |        | 705            |   |        |                  | 705    |   |                |   | 5,898   |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 6,603   |  
|Issuance of common stock in connection with the purchase of Partners Bank of Texas                           |  |                 |  |              |   |        | 2,345          |   |        |                  | 2,345  |   |                |   | 24,176  |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | 26,521  |  
|Shares held in Rabbi Trust                                                                                   |  |                 |  |              |   |        | (62            | ) |        |                  | (62    | ) |                |   | (634    | )                                          |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   | (696    | )
|Repurchase of common stock                                                                                   |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        | (830   | ) |  |   | (9,591  | ) |  |   |        |   |  |   | (9,591  | )
|Cash dividends paid                                                                                          |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        | (15,238 | ) |        |        |   |  |   |         |   |  |   |        |   |  |   | (15,238 | )
|                                                                                                             |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  
|BALANCE AT DECEMBER 31, 2007                                                                                 |  |                |  | $            |  |        | 74,926         |   |        | $                | 74,926 |   |                | $ | 110,367 |                                            |  | $      | 309,903 |   |        | (1,768 | ) |  | $ | (20,493 | ) |  | $ | 5,556  |   |  | $ | 480.259 |  
|                                                                                                             |  |                 |  |              |   |        |                |   |        |                  |        |   |                |   |         |                                            |  |        |         |   |        |        |   |  |   |         |   |  |   |        |   |  |   |         |  

See notes to consolidated financial statements.



F-5



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

(In thousands)



|                                                                                    |  |            |          |   |      |   |          |      |  |   |          |  
|----------------------------------------------------------------------------------- |  | ---------- | -------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                                                    |  | Year Ended |         
|                                                                                    |  | 2007       |          |   | 2006 |   |          | 2005 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                               |  |            |          |   |      |   |          |      |  |   |          |  
|Net income                                                                          |  | $          | 52,962   |   |      | $ | 45,840   |      |  | $ | 36,222   |  
|Adjustments to reconcile net income to net cash provided by operating activities:   |  |            |          |   |      |   |          |      |  |   |          |  
|Amortization and accretion of premiums and discounts on securities, net             |  |            | 2,194    |   |      |   | 2,447    |      |  |   | 3,117    |  
|Net (gain) loss on securities                                                       |  |            | (3       | ) |      |   | 358      |      |  |   | (60      | )
|Net (gain) loss on trading assets                                                   |  |            | (2       | ) |      |   | 302      |      |  |   | (147     | )
|Net gain on sale of loans                                                           |  |            | (1,991   | ) |      |   | (1,326   | )    |  |   | (1,455   | )
|Provision for credit losses                                                         |  |            | 3,820    |   |      |   | 4,058    |      |  |   | 14,371   |  
|Writedowns, less gains on sale, of real estate acquired by foreclosure              |  |            | (254     | ) |      |   | (232     | )    |  |   | (10      | )
|Depreciation and amortization                                                       |  |            | 9,056    |   |      |   | 8,530    |      |  |   | 7,760    |  
|Proceeds from principal paydowns of trading securities                              |  |            | 1        |   |      |   | 31,790   |      |  |   | 165,374  |  
|Proceeds from the sale of trading securities                                        |  |            | 13,137   |   |      |   |         |      |  |   |         |  
|Purchases of trading assets                                                         |  |            | (13,136  | ) |      |   | (3,811   | )    |  |   | (161,201 | )
|Deferred income tax expense                                                         |  |            | (1,659   | ) |      |   | 259      |      |  |   | (1,481   | )
|Stock-based compensation expense (net of tax benefit recognized)                    |  |            | 1,244    |   |      |   | 1,589    |      |  |   |         |  
|Excess tax benefits from share-based payment arrangements                           |  |            | (372     | ) |      |   | (620     | )    |  |   |         |  
|Net decrease (increase) decrease in loans held for sale                             |  |            | 977      |   |      |   | 1,621    |      |  |   | (321     | )
|Net gain on sale of bank assets                                                     |  |            | (717     | ) |      |   | (1,915   | )    |  |   | (259     | )
|Net decrease (increase) in accrued interest receivable and other assets             |  |            | 4,701    |   |      |   | (8,759   | )    |  |   | 2,519    |  
|Net increase in accrued interest payable and other liabilities                      |  |            | 158      |   |      |   | 15,722   |      |  |   | 1,233    |  
|                                                                                    |  |            |          |   |      |   |          |      |  |   |          |  
|Net cash provided by operating activities                                           |  |            | 70,116   |   |      |   | 95,853   |      |  |   | 65,662   |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                               |  |            |          |   |      |   |          |      |  |   |          |  
|Proceeds from the maturities or calls and paydowns of held-to-maturity securities   |  |            | 14,775   |   |      |   | 15,907   |      |  |   | 22,753   |  
|Proceeds from the sale of available-for-sale securities                             |  |            |         |   |      |   | 98,498   |      |  |   | 60,049   |  
|Proceeds from the maturities or calls and paydowns of available-for-sale securities |  |            | 88,789   |   |      |   | 103,299  |      |  |   | 143,582  |  
|Purchases of available-for-sale securities                                          |  |            | (139,681 | ) |      |   | (45,136  | )    |  |   | (164,853 | )
|Purchases of held-to-maturity securities                                            |  |            | (30,689  | ) |      |   | (18,007  | )    |  |   | (28,565  | )
|Net increase in loans held for investment                                           |  |            | (198,802 | ) |      |   | (371,352 | )    |  |   | (343,218 | )
|Proceeds from sale of real estate acquired by foreclosure                           |  |            | 1,080    |   |      |   | 2,792    |      |  |   | 2,269    |  
|Proceeds from sale of land held for sale                                            |  |            |         |   |      |   | 1,570    |      |  |   | 615      |  
|Purchase of Partners Bank of Texas (including transaction costs)                    |  |            | (25,319  | ) |      |   |         |      |  |   |         |  
|Cash and cash equivalents acquired with Partners Bank of Texas                      |  |            | 33,324   |   |      |   |         |      |  |   |         |  
|Purchase of MBM Advisors (including transaction costs)                              |  |            | (6,900   | ) |      |   |         |      |  |   |         |  
|Cash and cash equivalents acquired with MBM Advisors                                |  |            | 104      |   |      |   |         |      |  |   |         |  
|Purchase of Bank of the Hills, Inc. (including transaction costs)                   |  |            |         |   |      |   | (31,730  | )    |  |   |         |  
|Cash and cash equivalents acquired with Bank of the Hills, Inc.                     |  |            |         |   |      |   | 27,860   |      |  |   |         |  
|Purchase of Prestonwood Bancshares, Inc. (including transaction costs)              |  |            |         |   |      |   |         |      |  |   | (34,638  | )
|Cash and cash equivalents acquired with Prestonwood Bancshares, Inc.                |  |            |         |   |      |   |         |      |  |   | 49,035   |  
|Net change in interest-bearing deposits in financial institutions                   |  |            | 198      |   |      |   | 21,469   |      |  |   | 496      |  
|Proceeds from sale of loans                                                         |  |            | 49,909   |   |      |   | 79,902   |      |  |   | 52,368   |  
|Proceeds from sale of premises and equipment                                        |  |            | 428      |   |      |   | 31,975   |      |  |   | 379      |  
|Purchase of premises and equipment                                                  |  |            | (8,730   | ) |      |   | (5,394   | )    |  |   | (7,741   | )
|                                                                                    |  |            |          |   |      |   |          |      |  |   |          |  
|Net cash used in investing activities                                               |  |            | (221,514 | ) |      |   | (88,347  | )    |  |   | (247,469 | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                                               |  |            |          |   |      |   |          |      |  |   |          |  
|Net increase in deposit accounts                                                    |  |            | 173,334  |   |      |   | 198,244  |      |  |   | 276,471  |  
|Net decrease in other borrowed funds                                                |  |            | (28,242  | ) |      |   | (172,175 | )    |  |   | (27,725  | )
|Redemption of junior subordinated debt                                              |  |            |         |   |      |   | (29,640  | )    |  |   |         |  
|Issuance of trust preferred securities                                              |  |            | 25,774   |   |      |   |         |      |  |   |         |  
|Proceeds from issuance of common stock                                              |  |            | 4,580    |   |      |   | 4,816    |      |  |   | 4,625    |  
|Repurchase of common stock                                                          |  |            | (10,287  | ) |      |   | (8,918   | )    |  |   | (1,984   | )
|Excess tax benefits from share-based payment arrangements                           |  |            | 372      |   |      |   | 620      |      |  |   |         |  
|Dividends paid                                                                      |  |            | (15,238  | ) |      |   | (12,832  | )    |  |   | (10,865  | )
|                                                                                    |  |            |          |   |      |   |          |      |  |   |          |  
|Net cash provided by (used in) financing activities                                 |  |            | 150,293  |   |      |   | (19,885  | )    |  |   | 240,522  |  
|                                                                                    |  |            |          |   |      |   |          |      |  |   |          |  
|NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                |  |            | (1,105   | ) |      |   | (12,379  | )    |  |   | 58,715   |  
|CASH AND CASH EQUIVALENTS:                                                          |  |            |          |   |      |   |          |      |  |   |          |  
|Beginning of period                                                                 |  |            | 134,775  |   |      |   | 147,154  |      |  |   | 88,439   |  
|                                                                                    |  |            |          |   |      |   |          |      |  |   |          |  
|End of period                                                                       |  | $          | 133,670  |   |      | $ | 134,775  |      |  | $ | 147,154  |  
|                                                                                    |  |            |          |   |      |   |          |      |  |   |          |  
|Supplemental information:                                                           |  |            |          |   |      |   |          |      |  |   |          |  
|Income taxes paid                                                                   |  | $          | 23,250   |   |      | $ | 27,098   |      |  | $ | 18,752   |  
|Interest paid                                                                       |  |            | 104,973  |   |      |   | 75,913   |      |  |   | 51,505   |  
|Noncash investing and financing activities                                         |  |            |          |   |      |   |          |      |  |   |          |  
|Acquisition of real estate through foreclosure of collateral                        |  |            | 3,044    |   |      |   | 3,565    |      |  |   | 1,183    |  
|Loans to finance the sale of premises and equipment                                 |  |            |         |   |      |   | 1,400    |      |  |   |         |  
|Acquisition of Bank of the Hills, Inc.                                              |  |            |          |   |      |   |          |      |  |   |          |  
|Common Stock issued                                                                 |  |            |         |   |      |   | 40,971   |      |  |   |         |  
|Payable to Bank of the Hills, Inc. shareholders                                     |  |            |         |   |      |   | 336      |      |  |   |         |  
|Acquisition of Partners Bank of Texas                                               |  |            |          |   |      |   |          |      |  |   |          |  
|Common Stock issued                                                                 |  |            | 26,521   |   |      |   |         |      |  |   |         |  
|Acquisition of MBM Advisors, Inc.                                                   |  |            |          |   |      |   |          |      |  |   |          |  
|Payable to MBM Advisors, Inc. shareholders                                          |  |            | 4,442    |   |      |   |         |      |  |   |         |  

See notes to consolidated financial statements.



F-6



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



|1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
|-- | -------------------------------------------------------------------------

OrganizationSterling Bancshares, Inc. (Sterling Bancshares and together with its subsidiaries, the Company), headquartered in Houston, Texas, is a bank holding company that
has served the banking needs of small to medium-sized businesses for over 33 years. The Company provides commercial and consumer banking services in the greater metropolitan areas of Houston, San Antonio and Dallas, Texas through the 49 banking
centers of Sterling Bank (the Bank), a banking association chartered under the laws of the state of Texas.

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 financial
services industry. A summary of significant accounting policies follows:

Basis of PresentationThe consolidated
financial statements include the accounts of Sterling Bancshares and its subsidiaries except for those subsidiaries where it has been determined that the Company is not the primary beneficiary. Intercompany transactions have been eliminated in
consolidation. The Company operates its business as one segment providing banking services to a variety of customers.

Use of
EstimatesThe preparation of financial statements 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, the valuation of foreclosed real estate, deferred tax assets, goodwill and other intangibles, trading activities
and stock-based compensation.

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. Generally, 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 or loss until realized. Declines in the fair value of individual securities below
their cost that are determined to be other-than-temporary would result in writedowns, as a realized loss, of the individual securities to their fair value. In evaluating other-than-temporary impairment losses, management considers several
factors including the severity and the duration of time that the fair value has been less than cost, the credit quality of the issuer, and the intent and ability of the Company to hold the security until recovery of the fair value. 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.

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 securities. Interest earned on these assets is included in interest income.



F-7



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



Loans Held for SaleLoans held for sale are carried at the lower of aggregate cost
or market value. 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 are classified as held for sale when management has positively determined that
the loans will be sold in the foreseeable future and the Company has the ability to do so. The classification may be made upon origination or subsequent to the origination or purchase. Once a decision has been made to sell loans not previously
classified as held for sale, such loans are transferred into the held for sale classification and carried at the lower of cost or fair value.

Loans Held for InvestmentLoans held for investment are stated at the principal amount outstanding, net of the unearned discount and net deferred loan fees or costs. Unearned discount relates principally to consumer
installment loans. Interest income for loans is recognized principally by the simple interest method.

The Company provides equipment
financing to its customers through a variety of lease arrangements. Direct financing leases are included in loans held for investment and carried at the aggregate of lease payments receivable plus estimated residual value of the leased property,
less unearned income.

A loan is defined as impaired when based on current information and events, it is probable that the Company will be
unable to collect all amounts due, both interest and principal, according to the contractual terms of the loan agreement. The allowance for loan losses related to impaired loans is determined based on the difference between the carrying value of the
impaired loan and its fair value. The fair value 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. Interest payments on impaired loans are typically applied to principal unless collectibility of the principal amount is reasonably assured, in which case interest is recognized.

Nonperforming Loans and Past Due LoansNonperforming loans 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 or a deferral of interest or principal payments because of a borrowers financial difficulty.

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 its accruing status. When a loan is placed on nonaccrual status, all accrued but unpaid interest is charged to operations. 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 losses incurred on loans and binding loan
commitments. The reserve for losses on unfunded loan commitments is included



F-8



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



in other liabilities. All losses are charged to the allowance when the loss actually occurs or when a determination is made that a loss is probable.
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 and anticipated economic conditions and their potential 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.

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 probable losses that exist in the current loan
portfolio.

Premises and EquipmentLand is carried at cost. Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation expense is computed primarily using the straight-line method over the estimated useful lives (ranging from three to forty years) 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.

The Company evaluates for impairment its
long-lived assets to be held and used, and long-lived assets to be disposed of, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment is determined using the undiscounted
operating cash flows estimated over the remaining useful life of the related long-lived asset and the eventual disposal. In the event of impairment, the asset is written down to its fair market value. Assets to be disposed of are recorded at the
lower of net book value or fair market value less cost to sell and are classified as assets held for sale on the consolidated balance sheet at the date management commits to a plan of disposal.

Goodwill and Other IntangiblesIntangible assets consist primarily of core deposits and customer relationships. Intangible assets with
definite useful lives are amortized on an accelerated basis over their estimated life. Goodwill and intangible assets that have indefinite useful lives are subject to at least an annual impairment test and more frequently if a triggering event
occurs. If any such impairment is determined, a writedown is recorded.

Real Estate Acquired by ForeclosureThe Company
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.



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



Derivative Financial InstrumentsThe Companys interest rate risk management
strategy includes hedging the repricing characteristics of certain assets and liabilities so as to mitigate adverse effects on the Companys net interest margin and cash flows from changes in interest rates. The Company uses certain derivative
instruments to add stability to the Companys net interest income and to manage the Companys exposure to interest rate movements.

The Company may designate a derivative as either an accounting hedge of the fair value of a recognized fixed rate asset or an unrecognized firm commitment (fair value hedge) or an accounting hedge of a forecasted transaction or
of the variability of future cash flows of a floating rate asset or liability (cash flow hedge). All derivatives are recorded as other assets or other liabilities on the balance sheet at their respective fair values. To the extent a
hedge is considered effective, changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge are recorded in other comprehensive income, net of income taxes. For all hedge relationships, ineffectiveness resulting
from differences between the changes in fair value or cash flows of the hedged item and changes in fair value of the derivative are recognized as other income in the results of operations.

The Company estimates its interest rate derivatives using a standardized methodology that nets the discounted expected future cash receipts and cash
payments (based on observable market inputs). These future net cash flows, however, are susceptible to change due primarily to fluctuations in interest rates. As a result, the estimated values of these derivatives will typically change over time as
cash is received and paid and also as market conditions change. As these changes take place, they may have a positive or negative impact on our estimated valuations.

Income TaxesSterling 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
Sterling 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. The Company has established, and periodically reviews and re-evaluates, an estimated contingent tax liability on its consolidated balance sheet to provide for the possibility of adverse outcomes in tax matters.

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 deferred tax assets will be realized.

Stock-based
CompensationThe Company accounts for stock-based employee compensation plans using the fair value-based method of accounting in accordance with Statement of Financial Accounting Standards No. 123R, Share-Based Payment (Revised
2004) (SFAS 123R)which became effective beginning in 2006. The Companys results of operations reflect compensation expense for all employee stock-based compensation, including the unvested portion of stock options granted
prior to 2006. Prior to 2006, the Company accounted for stock-based employee compensation using the intrinsic value-based method of accounting, as permitted. Under the intrinsic value-based method of accounting, no compensation expense was
recognized for the Companys incentive stock options or for the Companys employee stock purchase plan. Compensation expense for restricted stock awards is based on the market price of the stock on the date of grant and is recognized
ratably over the vesting period of the award.



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



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



|                                                                                                                         |  |      |        |  
|------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------ | -
|                                                                                                                         |  | 2005 |       
|Net income, as reported                                                                                                  |  | $    | 36,222 |  
|Add: Stock-based employee compensation expense included in reported net income, net of related taxes                     |  |      | 457    |  
|Less: Total stock-based employee compensation expense determined under the fair value based method, net of related taxes |  |      | (952   | )
|                                                                                                                         |  |      |        |  
|Pro-forma net income                                                                                                     |  | $    | 35,727 |  
|                                                                                                                         |  |      |        |  
|Earnings per share:                                                                                                      |  |      |        |  
|Basicas reported                                                                                                        |  | $    | 0.53   |  
|                                                                                                                         |  |      |        |  
|Basicpro forma                                                                                                          |  | $    | 0.53   |  
|                                                                                                                         |  |      |        |  
|Dilutedas reported                                                                                                      |  | $    | 0.53   |  
|                                                                                                                         |  |      |        |  
|Dilutedpro forma                                                                                                        |  | $    | 0.52   |  
|                                                                                                                         |  |      |        |  

Profit Sharing PlanThe Company has a profit sharing plan that covers
substantially all employees. Contributions to the plan are accrued and paid only when the bank records predetermined earnings per share performance and achieves a minimum return on average assets consistent with the approved plan year budget, which
was $0.71 and 1.20%, respectively, for 2007.

Statements of Cash FlowsCash and cash equivalents include cash, due from
banks and federal funds sold. Generally, federal funds are invested for one-day periods.

Earnings Per ShareEarnings
per share (EPS) are presented under two formats: basic EPS and diluted EPS. Basic EPS is computed by dividing net income (after deducting dividends on preferred stock) by the weighted average number of shares outstanding during the year
excluding non-vested stock. Diluted EPS is computed by dividing net income by the weighted average number of shares outstanding and non-vested stock adjusted for the incremental shares issuable upon conversion of preferred stock and issuable upon
exercise of outstanding stock options.

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.

ReclassificationsCertain reclassifications have been made to prior year amounts to conform to current year presentation. All
reclassifications have been applied consistently for the periods presented.

Recent Accounting StandardsIn February
2006, the Financial Accounting Standard Board (FASB) issued SFAS No. 155 (SFAS 155) Accounting for Certain Hybrid Financial Instruments, an amendment of SFAS Nos. 133 and 140. It establishes, among other things,
the accounting for certain derivatives embedded in other financial instruments. The primary objective of this Statement with respect to SFAS 133, Accounting for Derivative Instruments and Hedging Activities, is to simplify accounting for any
hybrid financial instrument that contains an embedded derivative that would otherwise require bifurcation. The



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



primary objective of this Statement with respect to SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, is to eliminate a restriction on the passive derivative instruments that a qualifying special-purpose entity (QSPE) may hold. SFAS 155 is effective for all financial instruments acquired or issued after the beginning of an
entitys first fiscal year that begins after September 15, 2006. The adoption of this accounting standard on January 1, 2007 did not have a material impact on the Companys financial statements.

In March 2006, the FASB issued SFAS No. 156 (SFAS 156) Accounting for Servicing of Financial Assets, an amendment of SFAS 140. It
establishes, among other things, the accounting for all separately recognized servicing assets and servicing liabilities. SFAS 156 amends SFAS 140 to require that all separately recognized servicing assets and servicing liabilities be initially
measured at fair value, if practicable. This Statement is effective for fiscal years beginning after September 15, 2006. The adoption of this accounting standard on January 1, 2007 did not have a material impact on the Companys
financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48 (FIN 48) Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109 (SFAS
109) Accounting for Income Taxes. FIN 48 clarifies the application of SFAS 109 by defining a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in an enterprises
financial statements. Additionally, FIN 48 provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted FIN 48 on January 1, 2007. The
adoption of this accounting standard did not have a material impact on the Companys financial statements.

In September 2006, the
FASB issued SFAS No. 157 (SFAS 157) Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value
measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted SFAS 157 on January 1, 2008. The adoption of
this accounting standard did not have a material impact on the Companys financial statements.

In September 2006, the FASB issued
SFAS No. 158 (SFAS 158) Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires an employer to recognize
the funded status of a benefit plan in its statement of financial position. The funded status is measured as the difference between plan assets at fair value and the benefit obligation. An employer is also required to recognize as a component of
other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period. SFAS 158 also requires certain disclosures in the financial statements of additional information about certain effects on
net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. This statement is effective for financial statements issued for fiscal
years ending after December 15, 2006. The adoption of this accounting standard on January 1, 2007 did not have a material impact on the Companys financial statements.

In February 2007, the FASB issued Statement of Accounting Standards No. 159 (SFAS 159) The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions The Company adopted SFAS 159 on January 1, 2008. The adoption of this accounting standard did not have a material impact on the Companys financial statements.

In September 2006, the Emerging Issues Task Force (EITF) of the FASB ratified EITF Issue No. 06-4 Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 provides that an employer should recognize a liability for future benefits based on the substantive agreement with the
employee. The Issue should be applied to fiscal years beginning after December 15, 2007, with earlier application permitted. Management has not completed its evaluation of this issue; however, the Company does not expect it to be material to
its financial statements. The Company adopted EITF 06-4 on January 1, 2008 as a change in accounting principle through a cumulative-effect adjustment to retained earnings. The amount of the adjustment was not significant.

In December 2007, the FASB issued SFAS No. 141(R) (SFAS 141R) Business Combinations (Revised 2007). SFAS 141R Statement 141(R)
requires the acquiring entity in a business combination to recognize the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities
assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. This statement is effective for fiscal years
beginning after December 15, 2008. Management has not completed its evaluation of the impact of this standard; however, the Company does expect SFAS 141R to have a significant impact on the Companys accounting for business combinations
closing on or after January 1, 2009.

In December 2007, the FASB issued SFAS No. 160 (SFAS 160) Noncontrolling
Interests in Consolidated Financial Statementsan amendment of ARB No. 51. SFAS 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be
treated as equity transactions. This statement is effective for fiscal years beginning after December 15, 2008. Management has not completed its evaluation of the impact of this standard; however, the Company does not expect it to be material
to its financial statements.



|2. | ACQUISITIONS AND DIVESTITURES
|-- | -----------------------------

Acquisitions. On June 28, 2007, the Company acquired MBM Advisors, Inc. (MBM Advisors). MBM Advisors was an independent investment advisory and pension administration/consulting firm with approximately $700
million in assets under management providing full-services in the design, administration, investment management, and communication of retirement plans with offices in both Houston and Dallas, Texas. The completion of the acquisition of MBM Advisors
provides for increased opportunities to serve the owners of small and medium-sized businesses and their employees while enhancing our noninterest income. The Company entered into a share exchange agreement with MBM Advisors and the shareholders of
MBM Advisors in which the Company paid the shareholders an aggregate amount in cash equal to $6.0 million on the date of merger. An unconditional guaranteed cash payment of $3.0 million, payable over a three year earn-out period was recorded as part
of the purchase price at the estimated net present value. The agreement includes an earn-out consideration which is contingent upon maintaining or achieving specified earnings levels in future periods. When the contingency is resolved and additional
consideration is distributable, the Company records the fair value of the consideration issued as an additional cost of the acquisition. At December 31, 2007, the maximum potential amount of future



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



undiscounted payments the Company could be required to make under contingent payment provisions was approximately $4.4 million in the form of cash. During
2007, the Company recorded a $2.6 million payable as part of the earn-out consideration as an additional cost of the acquisition.

This
acquisition was accounted for using the purchase method of accounting in which the excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill, all of which is expected to be deductible for tax
purposes. The results of operations for this acquisition have been included in the Companys financial results beginning in the third quarter of 2007.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition. The purchase price allocation is preliminary and is subject to final determination (in
thousands).



|                                       |  |   |        |  
|-------------------------------------- |  | - | ------ | -
|Cash and cash equivalents              |  | $ | 104    |  
|Receivables                            |  |   | 1,518  |  
|Fixed assets                           |  |   | 33     |  
|Customer relationship intangibles      |  |   | 3,722  |  
|Goodwill                               |  |   | 7,901  |  
|Other assets                           |  |   | 74     |  
|                                       |  |   |        |  
|Total assets acquired                  |  |   | 13,352 |  
|Accounts payable and other liabilities |  |   | (1,631 | )
|                                       |  |   |        |  
|Total liabilities assumed              |  |   | (1,631 | )
|                                       |  |   |        |  
|Net assets acquired                    |  | $ | 11,721 |  
|                                       |  |   |        |  

Customer relationship intangibles are amortized using an economic life method based on client
attrition. As a result, amortization will decline over time with most of the amortization occurring during the initial years. The weighted average amortization period for intangibles related to the MBM Advisors acquisition is approximately six
years. Additional information related to intangible assets and goodwill is included in Note 7Goodwill and Other Intangibles.

On
March 30, 2007, the Company acquired Partners Bank of Texas (Partners Bank). Partners Bank was a privately held bank which operated four banking offices in the Houston area. The completion of the acquisition of Partners Bank has
enabled the Company to fill out its footprint in Northeast Houston. As of March 30, 2007, Partners Bank had assets of approximately $191 million, loans of $142 million and deposits of $166 million. The purchase price of $52.3 million consisted
of $26.5 million of the Companys common stock (2.3 million shares), cash totaling approximately $25.5 million and $264 thousand in acquisition-related costs for all of Partners Banks issued and outstanding shares of common stock. The
shares of the Companys common stock issued in the transaction were valued at the average of the closing price of the Companys common stock for the ten trading days immediately before the fifth trading day before March 30, 2007. This
acquisition was accounted for using the purchase method of accounting in which the excess of the purchase price over the estimated fair value of the net assets acquired was recorded as goodwill, none of which is expected to be deductible for tax
purposes.



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



The following table summarizes the estimated fair value of the assets acquired and liabilities
assumed at the date of acquisition. The purchase price allocation is preliminary and is subject to final determination (in thousands).



|                                               |  |   |          |  
|---------------------------------------------- |  | - | -------- | -
|Cash and cash equivalents                      |  | $ | 33,324   |  
|Available-for-sale securities                  |  |   | 10,956   |  
|Total loans                                    |  |   | 141,750  |  
|Allowance for loan losses                      |  |   | (1,496   | )
|Premises and equipment                         |  |   | 3,387    |  
|Accrued interest receivable                    |  |   | 935      |  
|Core deposit intangibles                       |  |   | 4,087    |  
|Goodwill                                       |  |   | 30,050   |  
|Other assets                                   |  |   | 558      |  
|                                               |  |   |          |  
|Total assets acquired                          |  |   | 223,551  |  
|                                               | 
|Deposits                                       |  |   | (165,766 | )
|Other borrowed funds                           |  |   | (4,714   | )
|Accrued interest payable and other liabilities |  |   | (806     | )
|                                               |  |   |          |  
|Total liabilities assumed                      |  |   | (171,286 | )
|                                               |  |   |          |  
|Net assets acquired                            |  | $ | 52,265   |  
|                                               |  |   |          |  

Core deposit intangibles (CDI) are amortized using an economic life method based on
deposit attrition. As a result, amortization will decline over time with most of the amortization occurring during the initial years. The weighted average amortization period for core deposit intangibles related to the Partners Bank acquisition is
approximately six years. Additional information related to intangible assets and goodwill is included in Note 7Goodwill and Other Intangibles.

On September 29, 2006, the Company acquired Kerrville, Texas-based BOTH, Inc., and its subsidiary bank, Bank of the Hills (BOTH). BOTH operated five banking centers in the San Antonio/Kerrville area.
The purchase price of $73.0 million consisted of $41.0 million of the Companys common stock (3.0 million shares), $31.5 million in cash and $536 thousand in acquisition-related costs. The shares of the Companys common stock issued in the
transaction were valued at the average of the closing price of the Companys common stock for the ten business days ending on August 22, 2006. This acquisition was accounted for using the purchase method of accounting in which the excess
of the purchase price over the estimated fair value of the net assets was recorded as goodwill, none of which is expected to be deductible for tax purposes.

On September 30, 2005, the Company acquired Dallas, Texas-based Prestonwood Bancshares, Inc. (Prestonwood), and its subsidiary bank, The Oaks Bank & Trust Company (The Oaks Bank),
in a cash merger. The Oaks Bank operated five banking offices in Dallas and doubled the Companys size in both assets and locations in the Dallas area. One acquired office was consolidated into an existing Sterling Bank location. The Company
paid $34.4 million plus transaction costs for all of Prestonwoods issued and outstanding shares of common stock. This acquisition was accounted for using the purchase method of accounting in which the excess of the purchase price over the
estimated fair value of the net assets was recorded as goodwill, none of which is expected to be deductible for tax purposes. The results of operations for this acquisition have been included in the Companys financial results beginning in the
fourth quarter of 2005.



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



|3. | SECURITIES
|-- | ----------

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



|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|------------------------------------------------------------------- |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                                    |  | December 31, 2007
|                                                                    |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                  |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                 | 11,563  |                      | $ | 40                    |  | $ | (2         | ) |  | $ | 11,601 
|Obligations of states of the U.S. and political subdivisions        |  |                   | 1,693   |                      |   | 22                    |  |   | (1         | ) |  |   | 1,714  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 450,132 |                      |   | 2,023                 |  |   | (3,376     | ) |  |   | 448,779
|Other securities                                                    |  |                   | 15,993  |                      |   |                      |  |   | (1,397     | ) |  |   | 14,596 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 479,381 |                      | $ | 2,085                 |  | $ | (4,776     | ) |  | $ | 476,690
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                 | 96,593  |                      | $ | 905                   |  | $ | (111       | ) |  | $ | 97,387 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 83,493  |                      |   | 8                     |  |   | (1,225     | ) |  |   | 82,276 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 180,086 |                      | $ | 913                   |  | $ | (1,336     | ) |  | $ | 179,663
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|                                                                    | 
|                                                                    |  | December 31, 2006
|                                                                    |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Available-for-Sale                                                  |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                 | 6,501   |                      | $ |                      |  | $ | (76        | ) |  | $ | 6,425  
|Obligations of states of the U.S. and political subdivisions        |  |                   | 2,306   |                      |   | 17                    |  |   | (2         | ) |  |   | 2,321  
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 395,614 |                      |   | 56                    |  |   | (9,855     | ) |  |   | 385,815
|Other securities                                                    |  |                   | 15,165  |                      |   |                      |  |   | (375       | ) |  |   | 14,790 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 419,586 |                      | $ | 73                    |  | $ | (10,308    | ) |  | $ | 409,351
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Held-to-Maturity                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                 | 91,946  |                      | $ | 495                   |  | $ | (380       | ) |  | $ | 92,061 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                   | 72,317  |                      |   | 91                    |  |   | (934       | ) |  |   | 71,474 
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Total                                                               |  | $                 | 164,263 |                      | $ | 586                   |  | $ | (1,314     | ) |  | $ | 163,535
|                                                                    |  |                   |         |                      |   |                       |  |   |            |   |  |   |        



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



Expected maturities of securities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment penalties. The contractual maturities of securities at December 31, 2007 are shown below (in thousands):



|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|------------------------------------------------------------------ |  | ------------------ | ------- | ---------------- | - | ------------- |  | ---------- | ------- |  | - | -------
|                                                                   |  | Available-for-Sale |         | Held-to-Maturity
|                                                                   |  | AmortizedCost      |         | Fair Value       |   | AmortizedCost |  | Fair Value
|Due in one year or less                                            |  | $                  | 10,178  |                  | $ | 10,193        |  | $          | 7,655   |  | $ | 7,693  
|Due after one year through five years                              |  |                    | 2,758   |                  |   | 2,802         |  |            | 48,976  |  |   | 49,365 
|Due after five years through ten years                             |  |                    | 320     |                  |   | 320           |  |            | 35,625  |  |   | 35,966 
|Due after ten years                                                |  |                    |        |                  |   |              |  |            | 4,337   |  |   | 4,363  
|Mortgage-backed securities and collateralized mortgage obligations |  |                    | 450,132 |                  |   | 448,779       |  |            | 83,493  |  |   | 82,276 
|Other securities                                                   |  |                    | 15,993  |                  |   | 14,596        |  |            |        |  |   |       
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        
|Total                                                              |  | $                  | 479,381 |                  | $ | 476,690       |  | $          | 180,086 |  | $ | 179,663
|                                                                   |  |                    |         |                  |   |               |  |            |         |  |   |        

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



|                              |  |              |       |      |   |        |      |  |   |        |  
|----------------------------- |  | ------------ | ----- | ---- | - | ------ | ---- |  | - | ------ | -
|                              |  | December 31, |      
|                              |  | 2007         |       | 2006 |   |        | 2005 | 
|Proceeds from sales and calls |  | $            | 2,600 |      | $ | 98,498 |      |  | $ | 60,049 |  
|Gross realized gains          |  |              | 3     |      |   | 204    |      |  |   | 206    |  
|Gross realized losses         |  |              |      |      |   | (562   | )    |  |   | (146   | )



F-17



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



Securities with unrealized losses segregated by length of impairment as of December 31, 2007,
were as follows (in thousands):



|                                                                    |  |                     |        |                       |   |      |           |  |               |        |                       |   |         |            |   |        |   |  |   |        
|------------------------------------------------------------------- |  | ------------------- | ------ | --------------------- | - | ---- | --------- |  | ------------- | ------ | --------------------- | - | ------- | ---------- | - | ------ | - |  | - | -------
|                                                                    |  | Less than 12 Months |        | More than 12 Months  
|                                                                    |  | AmortizedCost       |        | GrossUnrealizedLosses |   |      | FairValue |  | AmortizedCost |        | GrossUnrealizedLosses |   |         | Fair Value
|Available-for-Sale                                                  |  |                     |        |                       |   |      |           |  |               |        |                       |   |         |            |   |        |   |  |   |        
|Obligations of the U.S. Treasury and other U.S. government agencies |  | $                   |       |                       | $ |     |           |  | $             |       |                       | $ | 4,998   |            | $ | (2     | ) |  | $ | 4,996  
|Obligations of states of the U.S. and political subdivisions        |  |                     |       |                       |   |     |           |  |               |       |                       |   | 267     |            |   | (1     | ) |  |   | 266    
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 26,032 |                       |   | (124 | )         |  |               | 25,908 |                       |   | 221,995 |            |   | (3,252 | ) |  |   | 218,743
|Other securities                                                    |  |                     | 2,351  |                       |   | (48  | )         |  |               | 2,303  |                       |   | 13,642  |            |   | (1,349 | ) |  |   | 12,293 
|                                                                    |  |                     |        |                       |   |      |           |  |               |        |                       |   |         |            |   |        |   |  |   |        
|Total                                                               |  | $                   | 28,383 |                       | $ | (172 | )         |  | $             | 28,211 |                       | $ | 240,902 |            | $ | (4,604 | ) |  | $ | 236,298
|                                                                    |  |                     |        |                       |   |      |           |  |               |        |                       |   |         |            |   |        |   |  |   |        
|Held-to-Maturity                                                    |  |                     |        |                       |   |      |           |  |               |        |                       |   |         |            |   |        |   |  |   |        
|Obligations of states of the U.S. and political subdivisions        |  | $                   | 1,744  |                       | $ | (21  | )         |  | $             | 1,723  |                       | $ | 13,998  |            | $ | (90    | ) |  | $ | 13,908 
|Mortgage-backed securities and collateralized mortgage obligations  |  |                     | 44,562 |                       |   | (451 | )         |  |               | 44,111 |                       |   | 37,970  |            |   | (774   | ) |  |   | 37,196 
|                                                                    |  |                     |        |                       |   |      |           |  |               |        |                       |   |         |            |   |        |   |  |   |        
|Total                                                               |  | $                   | 46,306 |                       | $ | (472 | )         |  | $             | 45,834 |                       | $ | 51,968  |            | $ | (864   | ) |  | $ | 51,104 
|                                                                    |  |                     |        |                       |   |      |           |  |               |        |                       |   |         |            |   |        |   |  |   |        

Declines in the fair value of individual securities below their cost that are other-than-temporary
would result in writedowns, as a realized loss, of the individual securities to their fair value. In evaluating other-than-temporary impairment losses, management considers several factors including the severity and the duration that the fair
value has been less than cost, the credit quality of the issuer, and the intent and ability of the Company to hold the security until recovery of the fair value.

Securities in an unrealized loss position for more than 12 months include an other securities category that was in a loss position of approximately 10% of amortized cost basis. Management believes that the unrealized
losses on these securities were caused primarily by interest rate increases and prepayments. Because the decline in market value is attributable to changes in interest rates, not credit quality, and because the Company has the ability and
intent to hold these investments until a recovery of fair value, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2007. There are no remaining securities in the
Companys securities portfolio in a loss position greater than 10% of the Companys amortized cost basis at December 31, 2007.

Securities in a loss position of less than 12 months have an average loss of less than 1% of the amortized cost basis at December 31, 2007.



F-18



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



During the fourth quarter of 2006, realized losses of $562 thousand were recorded on certain
interest-only securities. These securities are tied to an underlying government guaranteed loan and are subject to prepayment and interest rate fluctuations. These securities had been in an unrealized loss position since the fourth quarter of 2005.
Given the current prepayment factors for the underlying loan and managements inability to determine when a full recovery of the value may occur, management considered these securities to be other than temporarily impaired at December 31,
2006.

The Company does not own any securities of any one issuer (other than the U.S. government and its agencies) for which the aggregate
adjusted cost exceeds 10% of the consolidated shareholders equity at December 31, 2007.

Securities with carrying values
totaling $412 million and fair values totaling $410 million were pledged to secure public deposits at December 31, 2007.



|4. | LOANS
|-- | -----

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



|                                |  |              |           |      |   |          
|------------------------------- |  | ------------ | --------- | ---- | - | ---------
|                                |  | December 31,
|                                |  | 2007         |           | 2006
|Loans held for sale             |  |              |           |      |   |          
|Commercial and industrial       |  | $            | 3,698     |      | $ | 3,723    
|Real estate:                    |  |              |           |      |   |          
|Commercial                      |  |              | 72,411    |      |   | 49,099   
|Construction                    |  |              | 2,338     |      |   | 1,900    
|                                |  |              |           |      |   |          
|Total loans held for sale       |  |              | 78,447    |      |   | 54,722   
|                                |  |              |           |      |   |          
|Loans held for investment       |  |              |           |      |   |          
|Domestic                        |  |              |           |      |   |          
|Commercial and industrial       |  |              | 912,604   |      |   | 824,494  
|Real estate:                    |  |              |           |      |   |          
|Commercial                      |  |              | 1,387,014 |      |   | 1,336,465
|Construction                    |  |              | 714,600   |      |   | 597,985  
|Residential mortgage            |  |              | 226,033   |      |   | 209,163  
|Consumer/other                  |  |              | 75,626    |      |   | 79,642   
|Foreign                         |  |              |           |      |   |          
|Commercial and industrial       |  |              | 21,571    |      |   | 27,479   
|Other loans                     |  |              | 2,389     |      |   | 2,617    
|                                |  |              |           |      |   |          
|Total loans held for investment |  |              | 3,339,837 |      |   | 3,077,845
|                                |  |              |           |      |   |          
|Total loans                     |  | $            | 3,418,284 |      | $ | 3,132,567
|                                |  |              |           |      |   |          



F-19



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



Loan maturities and rate sensitivity of the loans held for investment excluding residential mortgage
and consumer loans, at December 31, 2007 were as follows (in thousands):



|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|----------------------------------- |  | ---------------------- | --------- | ---------------------------------- | - | ------------------- |  | ----- | ------- |  | - | ---------
|                                    |  | Due in OneYear or Less |           | Due AfterOne YearThroughFive Years |   | Due AfterFive Years |  | Total
|Commercial and industrial           |  | $                      | 602,484   |                                    | $ | 268,116             |  | $     | 42,004  |  | $ | 912,604  
|Real estatecommercial              |  |                        | 181,075   |                                    |   | 649,016             |  |       | 556,923 |  |   | 1,387,014
|Real estateconstruction            |  |                        | 361,153   |                                    |   | 258,489             |  |       | 94,958  |  |   | 714,600  
|Foreign loans                       |  |                        | 9,012     |                                    |   | 14,607              |  |       | 341     |  |   | 23,960   
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|Total loans                         |  | $                      | 1,153,724 |                                    | $ | 1,190,228           |  | $     | 694,226 |  | $ | 3,038,178
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|Loans with a fixed interest rate    |  | $                      | 269,622   |                                    | $ | 831,454             |  | $     | 226,952 |  | $ | 1,328,028
|Loans with a floating interest rate |  |                        | 884,102   |                                    |   | 358,774             |  |       | 467,274 |  |   | 1,710,150
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          
|Total loans                         |  | $                      | 1,153,724 |                                    | $ | 1,190,228           |  | $     | 694,226 |  | $ | 3,038,178
|                                    |  |                        |           |                                    |   |                     |  |       |         |  |   |          

The loan portfolio consists of various types of loans made principally to borrowers located in the
Houston, San Antonio and Dallas metropolitan areas. As of December 31, 2007, 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 that management has the intent and ability to hold for the foreseeable future or until maturity are reported in the balance sheet as
loans held for investment stated at the principal amount outstanding adjusted for charge-offs, the allowance for loan losses, deferred fees or costs and unamortized premiums or discounts. Loans are classified as held for sale when management has
positively determined that the loans will be sold in the foreseeable future and the Company has the ability to do so. The classification may be made upon origination or subsequent to the origination or purchase. Once a decision has been made to sell
loans not previously classified as held for sale, such loans are transferred into the held for sale classification and carried at the lower of cost or fair value. As part of the Companys ongoing loan portfolio management, $36.1 million and
$122 million of performing commercial real estate loans acquired for investment purposes were transferred to the held for sale classification during 2007 and 2006, respectively. During 2007 and 2006, the Company sold $45.5 million and $79.2 million,
respectively, of performing commercial real estate loans that were originally acquired as held for investment. These sales resulted in net gains of $1.4 million and $350 thousand for 2007 and 2006, respectively. These loans were sold as part of the
Companys ongoing management of the size, concentrations and risk profile of the loan portfolio.

In the ordinary course of business,
the Company has granted loans to certain directors, officers and their affiliates. In the opinion of management, all transactions entered into between Sterling Bank (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.



F-20



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



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



|                                         |  |                        |       |   |      |   |        |  
|---------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ------ | -
|                                         |  | Year EndedDecember 31, |      
|                                         |  | 2007                   |       |   | 2006 |  
|Beginning balance                        |  | $                      | 2,293 |   |      | $ | 9,021  |  
|New loans                                |  |                        | 747   |   |      |   |       |  
|Loans to insiders/directors who resigned |  |                        |      |   |      |   | (2,606 | )
|Repayments                               |  |                        | (851  | ) |      |   | (4,122 | )
|                                         |  |                        |       |   |      |   |        |  
|Ending balance                           |  | $                      | 2,189 |   |      | $ | 2,293  |  
|                                         |  |                        |       |   |      |   |        |  

The recorded investment in impaired loans was $23.4 million and $11.4 million, at
December 31, 2007 and 2006, respectively. Such impaired loans required an allowance for loan losses of $3.9 million and $1.8 million, respectively. The average recorded investment in impaired loans for the year ended December 31,
2007, 2006 and 2005 was $14.5 million, $17.2 million and $23.0 million, respectively. No interest on impaired loans was received for the years ended December 31, 2006 and 2007. Interest income on impaired loans of $157 thousand was recognized
for cash payments received for the year ended December 31, 2005.

Included in impaired loans are nonperforming loans of $20.2 million
and $11.4 million at December 31, 2007 and December 31, 2006, respectively, which have been categorized by management as nonaccrual loans. Interest foregone on nonaccrual loans for 2007 and 2006 was approximately $1.9 million and
$1.3 million, respectively. The Company had one restructured loan totaling $769 thousand and $776 thousand as of December 31, 2007 and 2006, respectively.

When management doubts a borrowers ability to meet payment obligations, which typically occurs when principal or interest payments are more than 90 days past due, the loans are placed on nonaccrual status. Loans
90 days or more past due, not on nonaccrual were $1.3 million and $2.7 million at December 31, 2007 and December 31, 2006, respectively.



|5. | ALLOWANCE FOR CREDIT LOSSES
|-- | ---------------------------

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



|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                |  | Year Ended December 31, |       
|                                                                |  | 2007                    |        |   | 2006 |   |        | 2005 | 
|Allowance for Credit Losses                                     |  |                         |        |   |      |   |        |      |  |   |        |  
|Allowance for loan losses at beginning of period                |  | $                       | 32,027 |   |      | $ | 31,230 |      |  | $ | 29,406 |  
|Loans charged off                                               |  |                         | 5,962  |   |      |   | 9,450  |      |  |   | 15,713 |  
|Loan recoveries                                                 |  |                         | (3,065 | ) |      |   | (3,791 | )    |  |   | (2,752 | )
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Net loans charged-off                                           |  |                         | 2,897  |   |      |   | 5,659  |      |  |   | 12,961 |  
|Allowance for loan losses associated with acquired institutions |  |                         | 1,496  |   |      |   | 2,152  |      |  |   | 761    |  
|Provision for loan losses                                       |  |                         | 3,820  |   |      |   | 4,304  |      |  |   | 14,024 |  
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Allowance for loan losses at end of period                      |  |                         | 34,446 |   |      |   | 32,027 |      |  |   | 31,230 |  
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Reserve for unfunded loan commitments at beginning of period    |  |                         | 927    |   |      |   | 1,173  |      |  |   | 826    |  
|Provision for losses on unfunded loan commitments               |  |                         |       |   |      |   | (246   | )    |  |   | 347    |  
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Reserve for unfunded loan commitments at end of period          |  |                         | 927    |   |      |   | 927    |      |  |   | 1,173  |  
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Total allowance for credit losses                               |  | $                       | 35,373 |   |      | $ | 32,954 |      |  | $ | 32,403 |  
|                                                                |  |                         |        |   |      |   |        |      |  |   |        |  



F-21



---

##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



|6. | PREMISES AND EQUIPMENT
|-- | ----------------------

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



|                                               |  |              |         |   |      |   |         |  
|---------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                               |  | December 31, |        
|                                               |  | 2007         |         |   | 2006 |  
|Land                                           |  | $            | 4,230   |   |      | $ | 3,876   |  
|Buildings and improvements                     |  |              | 21,004  |   |      |   | 17,389  |  
|Furniture, fixtures and equipment              |  |              | 53,293  |   |      |   | 47,553  |  
|                                               |  |              |         |   |      |   |         |  
|                                               |  |              | 78,527  |   |      |   | 68,818  |  
|Less accumulated depreciation and amortization |  |              | (50,622 | ) |      |   | (45,343 | )
|                                               |  |              |         |   |      |   |         |  
|Total                                          |  | $            | 27,905  |   |      | $ | 23,475  |  
|                                               |  |              |         |   |      |   |         |  

Depreciation and amortization of premises and equipment totaled $6.9 million in 2007, $7.5 million
in 2006 and $7.2 million in 2005.

The Company completed three separate sale/leaseback transactions during 2006 resulting in total net
pre-tax gains of $1.8 million. A total of 18 properties were sold resulting in premises and equipment with a net book value of $21.9 million being removed from the Companys assets. These properties are being leased over various terms and are
accounted for as operating leases subsequent to the completion of each transaction. These transactions included the sale of a multi-tenant office building which resulted in a gain of $1.1 million and the sale of a banking center location in San
Antonio which resulted in a gain of $1.0 million. The third sale/leaseback transaction included the sale of 16 bank-owned locations for a total sales price of $28.3 million resulting in a deferred gain of $9.3 million. This gain will be
recognized into income over the lease term of approximately 19 years. The Company has no future commitments, obligations, provisions or circumstances that would require or result in its continuing involvement. As part of this transaction, the
Company recorded a net loss of $281 thousand.



|7. | GOODWILL AND OTHER INTANGIBLES
|-- | ------------------------------

The changes in the
carrying amount of goodwill by reporting unit for the years ended December 31, 2007 and 2006 are as follows (in thousands):



|                                   |  |         |        |            |   |        |  |       |        |  |   |        
|---------------------------------- |  | ------- | ------ | ---------- | - | ------ |  | ----- | ------ |  | - | -------
|                                   |  | Houston |        | SanAntonio |   | Dallas |  | Total
|Balance, January 1, 2006           |  | $       | 29,613 |            | $ | 27,205 |  | $     | 28,208 |  | $ | 85,026 
|BOTH, Inc. acquisition             |  |         |       |            |   | 45,832 |  |       |       |  |   | 45,832 
|                                   |  |         |        |            |   |        |  |       |        |  |   |        
|Balance, December 31, 2006         |  |         | 29,613 |            |   | 73,037 |  |       | 28,208 |  |   | 130,858
|BOTH, Inc. goodwill adjustments    |  |         |       |            |   | 6      |  |       |       |  |   | 6      
|Partners Bank of Texas acquisition |  |         | 30,050 |            |   |       |  |       |       |  |   | 30,050 
|MBM Advisors, Inc. acquisition     |  |         | 7,901  |            |   |       |  |       |       |  |   | 7,901  
|                                   |  |         |        |            |   |        |  |       |        |  |   |        
|Balance, December 31, 2007         |  | $       | 67,564 |            | $ | 73,043 |  | $     | 28,208 |  | $ | 168,815
|                                   |  |         |        |            |   |        |  |       |        |  |   |        



F-22



---

##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



The changes in the carrying amounts of the core deposit and other intangibles for the years ended
December 31, 2007 and 2006 are as follows (in thousands):



|                                   |  |                         |        |   |                                 |   |       |       |  |   |        |  
|---------------------------------- |  | ----------------------- | ------ | - | ------------------------------- | - | ----- | ----- |  | - | ------ | -
|                                   |  | Core DepositIntangibles |        |   | CustomerRelationshipIntangibles |   |       | Total | 
|Balance, January 1, 2006           |  | $                       | 3,551  |   |                                 | $ |      |       |  | $ | 3,551  |  
|Amortization expense               |  |                         | (1,012 | ) |                                 |   |      |       |  |   | (1,012 | )
|BOTH, Inc. acquisition             |  |                         | 7,760  |   |                                 |   |      |       |  |   | 7,760  |  
|                                   |  |                         |        |   |                                 |   |       |       |  |   |        |  
|Balance, December 31, 2006         |  |                         | 10,299 |   |                                 |   |      |       |  |   | 10,299 |  
|Amortization expense               |  |                         | (1,951 | ) |                                 |   | (186  | )     |  |   | (2,137 | )
|Partners Bank of Texas acquisition |  |                         | 4,087  |   |                                 |   |      |       |  |   | 4,087  |  
|MBM Advisors, Inc. acquisition     |  |                         |       |   |                                 |   | 3,722 |       |  |   | 3,722  |  
|                                   |  |                         |        |   |                                 |   |       |       |  |   |        |  
|Balance, December 31, 2007         |  | $                       | 12,435 |   |                                 | $ | 3,536 |       |  | $ | 15,971 |  
|                                   |  |                         |        |   |                                 |   |       |       |  |   |        |  

Core deposit and other intangibles are amortized on an accelerated basis over their estimated
lives of 10 years. The projected amortization for core deposit intangibles as of December 31, 2007 is as follows (in thousands):



|           |  |   |       
|---------- |  | - | ------
|2008       |  | $ | 2,318 
|2009       |  |   | 2,236 
|2010       |  |   | 2,138 
|2011       |  |   | 2,000 
|2012       |  |   | 1,790 
|Thereafter |  |   | 5,489 
|           |  |   |       
|Total      |  | $ | 15,971
|           |  |   |       



|8. | DEPOSITS
|-- | --------

Included in certificates and other time
deposits are individual amounts of $100,000 or more including brokered certificate of deposits. The remaining maturities of these deposits are summarized as of December 31, 2007 as follows (in thousands):



|                               |  |   |        
|------------------------------ |  | - | -------
|Three months or less           |  | $ | 491,804
|Over three through six months  |  |   | 100,951
|Over six through twelve months |  |   | 196,119
|Thereafter                     |  |   | 50,836 
|                               |  |   |        
|                               |  | $ | 839,710
|                               |  |   |        

Interest expense for certificates of deposit in excess of $100,000 was approximately $41.3
million, $28.5 million, and $14.6 million for the years ended December 31, 2007, 2006 and 2005, respectively.

At
December 31, 2007, the Bank had $82.7 million in brokered certificates of deposits that were in excess of $100,000, of which $76.3 million will mature in 2008. The remaining balance of these deposits was $6.4 million and will mature in
2009.

There are no major concentrations of deposits.



F-23



---

##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



|9. | OTHER BORROWED FUNDS
|-- | --------------------

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



|                                |  |              |         |      |   |        
|------------------------------- |  | ------------ | ------- | ---- | - | -------
|                                |  | December 31,
|                                |  | 2007         |         | 2006
|Federal Home Loan Bank advances |  | $            | 187,500 |      | $ | 193,500
|Federal funds purchased         |  |              | 9,225   |      |   | 27,175 
|Repurchase agreements           |  |              | 422     |      |   |       
|                                |  |              |         |      |   |        
|Total                           |  | $            | 197,147 |      | $ | 220,675
|                                |  |              |         |      |   |        

Federal Home Loan Bank AdvancesThe Company has an available line of
credit with the Federal Home Loan Bank (FHLB) of Dallas, which allows the Company to borrow on a collateralized basis. At December 31, 2007, we had total funds of $1.0 billion available under this agreement of which $188 million was
outstanding. At December 31, 2007, the Company had $40.0 million of FHLB advances that had an original maturity of ten years and $500 thousand of FHLB advances with an original maturity of 3 years. The remaining advances had maturities of under
ten days. The weighted-average interest rate on all borrowings was 2.91% at December 31, 2007. These borrowings are collateralized by single family residential mortgage loans, certain pledged securities, FHLB stock owned by the Company and any
funds on deposit with the FHLB. The Company utilizes these borrowings to meet liquidity needs. Maturing advances are replaced with either additional borrowings or through increased customer deposits.

Federal Funds Purchased and Securities Sold Under Agreements to RepurchaseThe Bank has available lines for federal funds purchased at
correspondent banks. As of December 31, 2007, federal funds outstanding with a correspondent bank were $9.2 million and payable upon demand. Securities sold under agreements to repurchase are secured short-term borrowings that typically mature
within thirty to ninety days. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the
underlying securities. Repurchase agreements totaled $422 thousand at December 31, 2007.

Line of CreditThe
Company has a revolving line of credit of $40.0 million with Wells Fargo Bank. This line of credit matures on September 30, 2008 and is subject to certain covenants. There were no borrowings outstanding on this line of credit at
December 31, 2007 and 2006.



F-24



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



|10. | JUNIOR SUBORDINATED DEBT/COMPANY MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES
|--- | ----------------------------------------------------------------------------------

As of December 31, 2007, the Company had the following issues of trust preferred securities outstanding and junior subordinated debt owed to trusts (dollars in thousands):



|                     |  |                    |  |                                     |        |              |                        |                                      |   |                     |  |                   
|-------------------- |  | ------------------ |  | ----------------------------------- | ------ | ------------ | ---------------------- | ------------------------------------ | - | ------------------- |  | ------------------
|Description          |  | Issuance Date      |  | TrustPreferredSecuritiesOutstanding |        | InterestRate |                        | JuniorSubordinatedDebt OwedTo Trusts |   | Final Maturity Date
|Statutory Trust One  |  | August 30, 2002    |  | $                                   | 20,000 |              | 3-monthLIBOR plus3.45% |                                      | $ | 20,619              |  | August 30, 2032   
|                     |  |                    |  |                                     |       
|Capital Trust III    |  | September 26, 2002 |  |                                     | 31,250 |              | 8.30% Fixed            |                                      |   | 32,217              |  | September 26, 2032
|                     |  |                    |  |                                     |       
|BOTH Capital Trust I |  | June 30, 2003      |  |                                     | 4,000  |              | 3-monthLIBOR plus3.10% |                                      |   | 4,124               |  | July 7, 2033      
|                     |  |                    |  |                                     |       
|Capital Trust IV     |  | March 26, 2007     |  |                                     | 25,000 |              | 3-monthLIBOR plus1.60% |                                      |   | 25,774              |  | June 15, 2037     
|                     |  |                    |  |                                     |        |              |                        |                                      |   |                     |  |                   
|Total                |  |                    |  | $                                   | 80,250 |              |                        |                                      | $ | 82,734              |  |                   
|                     |  |                    |  |                                     |        |              |                        |                                      |   |                     |  |                   

Each of the trusts is a statutory business trust organized for the sole purpose of issuing trust
securities and investing the proceeds thereof in junior subordinated debentures of Sterling Bancshares for Statutory Trust One, Capital Trust III and Capital Trust IV and BOTH, Inc. for BOTH Capital Trust I, the sole asset of each trust. The
preferred trust securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payments of the junior subordinated debentures held by the trust. The common
securities of each trust are wholly-owned by Sterling Bancshares. Each trusts ability to pay amounts due on the trust preferred securities is solely dependent upon Sterling Bancshares making payment on the related junior subordinated
debentures. Sterling Bancshares obligations under the junior subordinated debentures and other relevant trust agreements, in aggregate, constitute a full and unconditional guarantee by Sterling Bancshares of each respective trusts
obligations under the trust securities issued by each respective trust.

Each issuance of trust preferred securities outstanding is
mandatorily redeemable 30 years after issuance and is callable beginning five years after issuance if certain conditions are met (including the receipt of appropriate regulatory approvals). The trust preferred securities may be prepaid earlier upon
the occurrence and continuation of certain events including a change in their tax status or regulatory capital treatment. In each case, the redemption price is equal to 100% of the face amount of the trust preferred securities, plus the accrued and
unpaid distributions thereon through the redemption date.

The trust preferred securities issued under Statutory Trust One were privately
placed. The interest on these securities is a floating rate that resets quarterly. As of December 31, 2007, the floating rate was 8.28% on these securities compared to 8.81% at December 31, 2006.

The BOTH Capital Trust I preferred securities bear interest at a floating rate equal to the three-month LIBOR, plus 3.10%; however, the calculated
interest rate will not exceed 5.96% in the period to July 7, 2008. The rate on these securities was 5.96% at December 31, 2007 and 2006.



F-25



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



On March 26, 2007, the Company completed the issuance and sale in a private placement of $25.0
million in aggregate principal amount of trust preferred securities issued by the Companys newly formed subsidiary, Sterling Bancshares Capital Trust IV, a Delaware statutory trust (Trust IV). The trust preferred securities may be
called at par by the Company at any time after June 15, 2012 and require quarterly distributions of interest by Trust IV to the holder of the trust preferred securities. Distributions will be payable quarterly at a floating interest rate equal
to the 3-month LIBOR plus 1.60% per annum. Trust IV simultaneously issued 774 shares of its common securities to the Company for the purchase price of $774 thousand, which constitutes all of the issued and outstanding common
securities of Trust IV. As of December 31, 2007, the floating rate was 6.59% on these securities.

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

The Trust took such action in connection with the concurrent prepayment by the Company of all of its $29.6 million 9.20% Junior Subordinated Deferrable Interest Debentures (the Debentures) due March 21, 2031 which were
held exclusively by the Trust. The Debentures were prepaid on the redemption date at a prepayment price equal to the principal outstanding amount of the Debentures plus accrued and unpaid interest to the redemption date. During the second quarter of
2006, the Company wrote off the remaining unamortized debt issuance costs associated with these Debentures totaling $1.3 million.



|11. | DERIVATIVE FINANCIAL INSTRUMENTS
|--- | --------------------------------

The
Companys interest rate risk management strategy includes hedging the repricing characteristics of certain assets and liabilities so as to mitigate adverse effects on the Companys net interest margin and cash flows from changes in
interest rates. The Company uses certain derivative instruments to add stability to the Companys net interest income and to manage the Companys exposure to interest rate movements.

The Company may designate a derivative as either an accounting hedge of the fair value of a recognized fixed rate asset or an unrecognized firm
commitment (fair value hedge) or an accounting hedge of a forecasted transaction or of the variability of future cash flows of a floating rate asset or liability (cash flow hedge). All derivatives are recorded as other assets
or other liabilities on the balance sheet at their respective fair values. To the extent a hedge is considered effective, changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge is recorded in other
comprehensive income, net of income taxes. For all hedge relationships, ineffectiveness resulting from differences between the changes in fair value or cash flows of the hedged item and changes in fair value of the derivative are recognized as other
income in the results of operations.

The Company estimates its interest rate derivatives using a standardized methodology that nets the
discounted expected future cash receipts and cash payments (based on observable market inputs). These future net cash flows, however, are susceptible to change due primarily to fluctuations in interest rates. As a result, the estimated values of
these derivatives will typically change over time as cash is received and paid and also as market conditions change. As these changes take place, they may have a positive or negative impact on our estimated valuations.

In June 2003, the Bank entered into an interest rate swap agreement with a notional amount of $50.0 million in which the Bank swapped the fixed rate
to a floating rate. Under the terms of the swap agreement, the



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



Bank receives a fixed coupon rate of 7.375% and pays a variable interest rate equal to the three-month LIBOR that is reset on a quarterly basis, plus 3.62%.
This swap is designated as a fair-value hedge of the Companys $50.0 million subordinated debentures and qualifies for the short-cut method of accounting. These subordinated notes bear interest at a fixed rate of 7.375% and mature
on April 15, 2013. Interest payments are due semi-annually. The subordinated notes may not be redeemed or called prior to their maturity. The swaps fair value is included in other liabilities and was $1.3 million and $3.8 million with a
floating rate of 8.87% and 9.00% on December 31, 2007 and 2006, respectively. The Companys credit exposure on the interest rate swap is limited to its net favorable fair value, if any, and the interest payment receivable from the
counterparty.

During 2006, the Company purchased a prime interest rate floor with a notional amount of $113 million and a strike rate of
8.00% and a prime interest rate collar contract with a notional amount of $250 million and an 8.42% interest rate cap and an 8.00% interest rate floor. These contracts are designated as cash flow hedges of the monthly interest receipts from a
portion of the Companys portfolio of prime-based variable-rate loans. The interest rate floor and interest rate collar have termination dates of August 1, 2009 and August 1, 2010, respectively.

For cash flow hedges, the effective portion of the gain or loss on the derivative hedging instrument is reported in other comprehensive income, while the
ineffective portion (indicated by the excess of the cumulative change in the fair value of the derivative over that which is necessary to offset the cumulative change in expected future cash flows on the hedge transaction) is recorded in current
earnings as other income or other expense. The accumulated net after-tax gain on the floor and collar contracts included in accumulated other comprehensive income totaled $7.3 million at December 31, 2007. The total fair value of the
interest-rate collar and floor was $12.2 million at December 31, 2007 and is included in other assets.



|12. | INCOME TAXES
|--- | ------------

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



|                            |  |                         |        |   |      |   |        |  |   |        |  
|--------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ |  | - | ------ | -
|                            |  | Year Ended December 31, |       
|                            |  | 2007                    |        |   | 2006 |   | 2005   | 
|Current income tax expense  |  | $                       | 27,367 |   |      | $ | 21,680 |  | $ | 17,431 |  
|Deferred income tax expense |  |                         | (1,659 | ) |      |   | 259    |  |   | (1,481 | )
|                            |  |                         |        |   |      |   |        |  |   |        |  
|Total income tax expense    |  | $                       | 25,708 |   |      | $ | 21,939 |  | $ | 15,950 |  
|                            |  |                         |        |   |      |   |        |  |   |        |  

The provision for income taxes differs from the amount computed by applying the federal income tax
statutory rate of 35% to income from continuing operations as follows (in thousands):



|                                                 |  |                         |        |   |      |   |        |      |  |   |        |  
|------------------------------------------------ |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                 |  | Year Ended December 31, |       
|                                                 |  | 2007                    |        |   | 2006 |   |        | 2005 | 
|Taxes calculated at statutory rate               |  | $                       | 27,535 |   |      | $ | 23,723 |      |  | $ | 18,261 |  
|Increase (decrease) resulting from:              |  |                         |        |   |      |   |        |      |  |   |        |  
|Release of reserves                              |  |                         | (98    | ) |      |   | (473   | )    |  |   | (851   | )
|Tax-exempt interest income                       |  |                         | (1,126 | ) |      |   | (868   | )    |  |   | (847   | )
|Tax-exempt income from bank-owned life insurance |  |                         | (1,185 | ) |      |   | (989   | )    |  |   | (1,006 | )
|Other, net                                       |  |                         | 582    |   |      |   | 546    |      |  |   | 393    |  
|                                                 |  |                         |        |   |      |   |        |      |  |   |        |  
|Income tax expense, as reported                  |  | $                       | 25,708 |   |      | $ | 21,939 |      |  | $ | 15,950 |  
|                                                 |  |                         |        |   |      |   |        |      |  |   |        |  



F-27



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



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



|                                                 |  |      |        |      |   |       
|------------------------------------------------ |  | ---- | ------ | ---- | - | ------
|                                                 |  | 2007 |        | 2006
|Deferred tax assets:                             |  |      |        |      |   |       
|Real estate acquired by foreclosure              |  | $    |       |      | $ | 78    
|Depreciable assets                               |  |      | 3,446  |      |   | 3,534 
|Allowance for credit losses                      |  |      | 12,106 |      |   | 11,533
|Net operating loss carryforward                  |  |      | 1,083  |      |   | 2     
|Deferred compensation                            |  |      | 1,559  |      |   | 1,525 
|Unrealized loss on available-for-sale securities |  |      | 925    |      |   | 3,582 
|SCMC indemnification reserve                     |  |      |       |      |   | 587   
|Other                                            |  |      | 1,677  |      |   | 1,084 
|                                                 |  |      |        |      |   |       
|Total deferred tax assets                        |  |      | 20,796 |      |   | 21,925
|Deferred tax liabilities:                        |  |      |        |      |   |       
|Federal Home Loan Bank stock dividends           |  |      | 723    |      |   | 769   
|Core deposit intangibles                         |  |      | 4,352  |      |   | 3,605 
|Loan origination fees                            |  |      | 1,912  |      |   | 3,138 
|Unrealized gain on cash flow hedge               |  |      | 3,934  |      |   | 967   
|Real estate acquired by foreclosure              |  |      | 23     |      |   |      
|Prepaid expenses                                 |  |      | 680    |      |   | 625   
|Other                                            |  |      | 139    |      |   | 68    
|                                                 |  |      |        |      |   |       
|Total deferred tax liabilities                   |  |      | 11,763 |      |   | 9,172 
|                                                 |  |      |        |      |   |       
|Net deferred tax assets                          |  | $    | 9,033  |      | $ | 12,753
|                                                 |  |      |        |      |   |       

The total net deferred tax assets amount is included in the balance sheet in other assets. Net
operating loss carryforwards expire in 2027. The Company has determined that a valuation reserve is not required for deferred tax assets as it is more likely than not that these assets will be primarily realized through future taxable income.

The Company adopted the provisions of FIN 48 on January 1, 2007. There was no effect on the Companys consolidated balance
sheet or income statement as a result of implementing FIN 48. As of December 31, 2007 and January 1, 2007, the Company had unrecognized tax benefits of $619 thousand and $717 thousand, respectively, which would favorably impact the
annual effective tax rate upon recognition. These unrecognized tax benefits result from open state tax examination periods which could expire and result in these tax benefits being recognized in the next 12 months.

A reconciliation of the beginning and ending amounts of the unrecognized tax benefit is listed below (in thousands):



|                                                            |  |   |     |  
|----------------------------------------------------------- |  | - | --- | -
|Balance at January 1, 2007                                  |  | $ | 717 |  
|Decreases due to lapse of applicable statute of limitations |  |   | (98 | )
|                                                            |  |   |     |  
|Balance at December 31, 2007                                |  | $ | 619 |  
|                                                            |  |   |     |  

The Companys policy is that it recognizes interest and penalties as a component of income
tax expense. As of December 31, 2007, the Company had accrued interest and penalties of $95 thousand.

The Company files income tax
returns in the U.S. federal jurisdiction and various state jurisdictions. During 2005, the Internal Revenue Service commenced an examination of the Companys federal income tax return for the 2003 tax year. This examination was completed during
the third quarter of 2006, resulting in an



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



additional federal income tax obligation of $1.2 million. This obligation was previously accrued as part of the Companys overall tax contingency
reserve. During the years ended December 31, 2007, 2006 and 2005, the Company revised its estimate to remove contingent liabilities totaling $98 thousand, $473 thousand and $851 thousand, respectively, related to the expiration of previous tax
contingencies and refunds received, including the filing of various state tax returns related to the Companys mortgage banking segment which was sold in 2003.



|13. | EMPLOYEE BENEFITS
|--- | -----------------

Profit sharing
planThe Companys profit sharing plan includes substantially all employees. The total contribution to the plan is limited to 5% of the Companys pre-tax net income, subject to Internal Revenue Service limitations.
Contributions to the plan consist of a 401(k) and profit sharing component. The 401(k) contribution is based on a 50% Company match of the first 6% of eligible compensation that an employee may elect to defer and fully vests after four years of
service. Employee contributions to the 401(k) plan accounts are optional. Contributions to the 401(k) are accrued and funded currently. In 2007, the matching expense for the 401(k) was $1.3 million. The profit sharing contribution is made at the
discretion of the Board of Directors. The 2007 profit sharing plan metrics changed from those in 2006 and will be paid out only when the Bank records predetermined earnings per share performance and achieves a minimum return on average assets. Total
profit sharing and matching contribution expense for 2007 was approximately $4.0 million. In 2006 and prior years, profit sharing was paid out only when the Bank achieved a minimum 12% ROE. Total profit sharing and matching contribution expense for
2006 was approximately $3.4 million. During 2005, there was no profit sharing contribution as the Company did not achieve the minimum ROE threshold.

Stock-based compensationThe 2003 Stock Incentive and Compensation Plan (the 2003 Stock Plan), which has been approved by the shareholders, permits the grant of unrestricted stock units,
restricted stock unit awards, phantom stock awards, stock appreciation rights or stock options. On August 31, 2007, the Board of Directors of the Company approved and adopted the Long-Term Incentive Stock Performance Program (the
Program) pursuant to which the Human Resources Programs Committee of the Board of Directors (the Committee) may award equity-based awards to employees who are actively employed by the Company. All awards will be made under the 2003
Stock Plan and vest over a three year period. Certain share awards granted under previous shareholder-approved plans are still outstanding and unvested at December 31, 2007.

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

Total stock-based compensation
expense that was charged against income was $1.7 million, $2.2 million and $703 thousand for the years ended December 31, 2007, 2006 and 2005, respectively. The total income tax benefit recognized in the income statement for share-based
compensation arrangements was $407 thousand, $654 thousand and $246 thousand for the years ended December 31, 2007, 2006 and 2005, respectively.

Cash received for exercises under all share-based payment arrangements during the years ended December 31, 2007, 2006 and 2005 was $4.2 million, $4.9 million and $3.4 million, respectively. The actual



F-29



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



tax benefit realized for the tax deductions under all share-based payment arrangements totaled $372 thousand, $620 thousand and $1.0 million,
respectively, for the years ended December 31, 2007, 2006 and 2005.

The Company issues new shares upon the exercise of all
share-based payment arrangements.

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



|                        |  |       |   |  |       |  
|----------------------- |  | ----- | - |  | ----- | -
|                        |  | 2007  |   |  | 2006  |  
|Expected term (years)   |  | 3.80  |   |  | 4.78  |  
|Risk-free interest rate |  | 3.65  | % |  | 4.74  | %
|Historical volatility   |  | 21.69 | % |  | 30.18 | %
|Dividend yield          |  | 1.46  | % |  | 1.56  | %

A summary of changes in outstanding stock options as of December 31, 2007 is as follows:



|                                         |  |                      |   |  |                              |       |                                         |      |                                       |   |      
|---------------------------------------- |  | -------------------- | - |  | ---------------------------- | ----- | --------------------------------------- | ---- | ------------------------------------- | - | -----
|                                         |  | Shares(In thousands) |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm |      | AggregateIntrinsicValue(In thousands)
|Shares under option, beginning of period |  | 1,591                |   |  | $                            | 7.73  |                                         |      |                                       |   |      
|Shares granted                           |  | 270                  |   |  |                              | 11.59 |                                         |      |                                       |   |      
|Shares forfeited or expired              |  | (15                  | ) |  |                              | 9.41  |                                         |      |                                       |   |      
|Shares exercised                         |  | (562                 | ) |  |                              | 6.68  |                                         |      |                                       |   |      
|                                         |  |                      |   |  |                              |       |                                         |      |                                       |   |      
|Shares under option, end of period       |  | 1,284                |   |  | $                            | 8.99  |                                         | 5.84 |                                       | $ | 2,789
|                                         |  |                      |   |  |                              |       |                                         |      |                                       |   |      
|Shares exercisable, end of period        |  | 795                  |   |  | $                            | 7.51  |                                         | 3.97 |                                       | $ | 2,675
|                                         |  |                      |   |  |                              |       |                                         |      |                                       |   |      

The weighted-average grant-date fair value of the options granted during the years ended
December 31, 2007, 2006 and 2005 was $3.31, $3.55 and $2.63, respectively. The total intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005 was $1.2 million, $2.7 million and $1.5 million,
respectively.



F-30



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



Share AwardsA summary of the status of the Companys nonvested share awards
as of December 31, 2007 is presented below (shares in thousands):



|                                          |  |                      |   |  |                                     |      
|----------------------------------------- |  | -------------------- | - |  | ----------------------------------- | -----
|                                          |  | Shares(In thousands) |   |  | WeightedAverageGrant DateFair Value
|Nonvested share awards, beginning of year |  | 253                  |   |  | $                                   | 11.00
|Shares granted                            |  | 259                  |   |  |                                     | 11.77
|Shares forfeited                          |  | (45                  | ) |  |                                     | 11.30
|Shares vested                             |  | (91                  | ) |  |                                     | 11.47
|                                          |  |                      |   |  |                                     |      
|Nonvested share awards, end of year       |  | 376                  |   |  | $                                   | 11.58
|                                          |  |                      |   |  |                                     |      

As of December 31, 2007, there was $3.4 million of total unrecognized compensation expense
related to nonvested share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 2.43 years. The total fair value of shares vested during the year ended December 31, 2007 was $1.0
million.

On December 20, 2007, the Company entered into a new employment agreement with its chief executive officer
(CEO). This agreement replaces the existing agreement, in which the CEO was awarded 187,500 Performance Restricted Share Units (PRSUs), to be earned based on specified performance metrics. Under the revised agreement, the new
performance metrics include an EPS Growth versus the Companys peers measure and a return on assets versus peers performance measure. In addition, the vesting period changed from four years to three years. Based on these performance
metrics, the CEO will earn a specific number of the eligible share units on December 31, 2009. The Company had previously recorded total compensation expense of $665 thousand for 2006 under the previous agreement. Additional compensation
expense of $36 thousand was recorded in 2007 as a result of the new agreement. As of December 31, 2007, there was $1.4 million of total unrecognized compensation expense related to the PRSUs. If the performance measures are not met, no future
compensation expense will be recognized and any previously recognized compensation expense will be reversed.

Stock purchase
planThe Company offers the 2004 Employee Stock Purchase Plan (the Purchase Plan) effective July 1, 2004, which superceded the 1994 Employee Stock Purchase Plan (the old ESPP) to eligible employees. An
aggregate of 2.3 million shares of Company common stock may be issued under this plan subject to adjustment upon changes in capitalization. The Purchase Plan is a compensatory benefit plan to all employees who are employed for more than 20
hours per week and meet minimum length-of-service requirements of three months. The Purchase Plan is subscribed through payroll deductions which may not exceed 10% of the eligible employees compensation. The purchase price for shares available
under the Purchase Plan is 90% of the lower of the fair market value on either the first or last day of each quarter. Compensation expense associated with the Purchase Plan was determined using a Black-Scholes-Merton option pricing formula.
Assumptions used in this formula were the same as disclosed above for incentive stock options except that an expected term of three months was used. During the year ended December 31, 2007, 46,672 shares were subscribed for through payroll
deductions under the Purchase Plan compared to 35,374 shares for the year ended December 31, 2006.

Deferred Compensation
PlansIn 1996 the Company adopted the Sterling Bancshares, Inc. Deferred Compensation Plan (the Deferred Compensation Plan). The Deferred Compensation Plan enabled eligible participants, including certain executives, to make
and receive contributions on a tax deferred basis. Additionally, the Deferred Compensation Plan, which was amended and restated effective January 1, 2001,



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



allowed officers to make an election to defer up to 90% of their base salary, annual bonus, and/or special bonus awards, if any, prior to the beginning of
each calendar year. Any deferred amounts became unfunded liabilities of the Company. The Company had an unfunded deferred compensation liability of $2.8 million at December 31, 2006 which was included in other liabilities. The Company paid a
specified rate of return to the participants of the Deferred Compensation Plan as determined by the Human Resources Programs Committee. The Committee used the year-to-date, 10-year average Treasury rate as a guide in determining the effective
interest rate for each year. For 2007, 2006 and 2005, the interest rate paid was 5.30%, 5.26% and 5.18%, respectively. The Company recorded compensation expense of $118 thousand, $225 thousand and $388 thousand related to this plan for 2007, 2006
and 2005, respectively. There were no discretionary contributions made in 2007, 2006 or 2005.

On August 1, 2007, the Board of
Directors approved an Amended and Restated Deferred Compensation Plan (Amended Deferred Compensation Plan) for Sterling Bancshares, Inc. which was effective for compensation periods beginning in September 2007. In connection with the
Amended Deferred Compensation plan, the Company established a Rabbi Trust which was funded by the Company in order to satisfy the Companys contractual liability to pay benefits under the terms of the plan. Plan assets are invested generally in
the same investments available to the participants of the 401(k) plan, including Sterling Bancshares, Inc. stock. The Rabbi Trust is subject to the claims of the Companys creditors.

At December 31, 2007, investments held in the Rabbi Trust of $2.3 million were included in available-for-sale investments on the Companys
consolidated balance sheet. Changes in the fair value of the plan assets are excluded from earnings and reported, net of tax, as accumulated comprehensive income or loss until realized. The Company had realized gains of $93 thousand on plan assets
which are reinvested into the plan assets. Plan assets that are invested in the Companys common stock are included as reduction of the Companys shareholder equity. The funded Deferred Compensation Plan liabilities totaling $3.0 million
are included in other liabilities at December 31, 2007. Additional compensation expense of $64 thousand was recorded during 2007 as a result of changes in the plan assets.

The Company also has an unfunded defined benefit deferred compensation agreements for certain former management as the result of prior acquisitions. At
December 31, 2007 and 2006, these deferred compensation agreements have an estimated benefit obligation of $1.7 million and $1.9 million, respectively which were included in other liabilities. These retirement agreements provide for varying
monthly benefits ranging from ten years to the life of the participant.



|14. | SHAREHOLDERS EQUITY
|--- | --------------------

Treasury
stockOn April 25, 2005, the Companys Board of Directors authorized the repurchase of up to 2,500,000 shares of common stock, not to exceed 500,000 shares in any calendar year. On January 29, 2007, the Companys
Board of Directors authorized an increase in the number of shares to be repurchased to adjust for the three-for-two stock split approved by the Board of Directors on October 30, 2006. On July 30, 2007, the Companys Board of Directors
amended its existing common stock repurchase program. The amendment increased by 750,000 shares the total number of shares that may be repurchased by the Company under the Program in the fiscal year 2007. The aggregate number of shares originally
approved by the Board of Directors for repurchase under the Program remains unchanged at 3,750,000 shares. The Company may repurchase shares of common stock from time to time in the open market or through privately negotiated transactions. The
Company may repurchase shares from available cash or other borrowings. In 2007, the Company repurchased 830,000 shares at an average cost per share of $11.56, for a total purchase price of $9.6 million.

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 centers. The shares are sold to investors who may assist in the business development efforts of the opening banking



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



center and are convertible to common shares dependent on that banking center meeting certain performance and deposit growth goals. The conversion ratio into
common stock is predetermined at time of placement. There were no shares outstanding at December 31, 2007 or 2006.



|15. | EARNINGS PER COMMON SHARE
|--- | -------------------------

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



|                                                                   |  |                         |        |      |   |        |  |   |       
|------------------------------------------------------------------ |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                                                                   |  | Year Ended December 31,
|                                                                   |  | 2007                    |        | 2006 |   | 2005  
|Net income                                                         |  | $                       | 52,962 |      | $ | 45,840 |  | $ | 36,222
|Basic:                                                             |  |                         |        |      |   |        |  |   |       
|Weighted average shares outstanding                                |  |                         | 72,659 |      |   | 68,834 |  |   | 67,932
|Diluted:                                                           |  |                         |        |      |   |        |  |   |       
|Add incremental shares for:                                        |  |                         |        |      |   |        |  |   |       
|Assumed exercise of outstanding options and nonvested share awards |  |                         | 467    |      |   | 699    |  |   | 710   
|                                                                   |  |                         |        |      |   |        |  |   |       
|Total                                                              |  | $                       | 73,126 |      | $ | 69,533 |  | $ | 68,642
|                                                                   |  |                         |        |      |   |        |  |   |       
|Earnings per share                                                 |  |                         |        |      |   |        |  |   |       
|Basic                                                              |  | $                       | 0.73   |      | $ | 0.67   |  | $ | 0.53  
|                                                                   |  |                         |        |      |   |        |  |   |       
|Diluted                                                            |  | $                       | 0.72   |      | $ | 0.66   |  | $ | 0.53  
|                                                                   |  |                         |        |      |   |        |  |   |       

The incremental shares for the assumed exercise of the outstanding options were determined by
application of the treasury stock method. The calculation of diluted earnings per share excludes 551 thousand, 139 thousand and 168 thousand options outstanding during 2007, 2006, and 2005, respectively, that were anti-dilutive.



|16. | COMMITMENTS AND CONTINGENCIES
|--- | -----------------------------

LeasesA summary as of December 31, 2007, of noncancelable future operating lease commitments is as follows (in thousands):



|           |  |   |       
|---------- |  | - | ------
|2008       |  | $ | 6,886 
|2009       |  |   | 6,538 
|2010       |  |   | 6,277 
|2011       |  |   | 6,202 
|2012       |  |   | 5,355 
|Thereafter |  |   | 58,196
|           |  |   |       
|Total      |  | $ | 89,454
|           |  |   |       

In 2007, the Company entered into a lease agreement to consolidate our central and corporate
offices at one central location in Houston, Texas. This move will be completed over the next three years and the timing of the move is aligned with the remaining renewals and expirations of our existing leases.

Rent expense under all noncancelable operating lease obligations, net of income from noncancelable subleases aggregated, was approximately $9.0 million,
$5.2 million and $4.3 million for the years ended December 31, 2007, 2006 and 2005, 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 these matters will not have a material adverse
impact on the consolidated financial statements.



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



Severance and non-competition agreementsThe Company has entered into severance
and non-competition agreements with its chief executive officers (discussed in Note 13) and certain other executive officers. Under these agreements, upon a termination of employment under the circumstances described in the agreements, each would
receive: (i) two years base pay; (ii) an annual bonus for two years in an amount equal to the highest annual bonus paid to the respective executive officer during the three years preceding termination or change in control (as defined
in the agreement); (iii) continued eligibility for Company perquisites, welfare and life insurance benefit plans, to the extent permitted, and in the event participation is not permitted, payment of the cost of such welfare benefits for a
period of two years following termination of employment; (iv) payment of up to $20,000 in job placement fees; and (v) to the extent permitted by law or the applicable plan, accelerated vesting and termination of all forfeiture provisions
under all benefit plans, options, restricted stock grants or other similar awards.



|17. | FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
|--- | -------------------------------------------------

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

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



|                             |  |              |         |      |   |        
|---------------------------- |  | ------------ | ------- | ---- | - | -------
|                             |  | December 31,
|                             |  | 2007         |         | 2006
|Commitments to extend credit |  | $            | 929,227 |      | $ | 822,209
|Standby letters of credit    |  |              | 135,345 |      |   | 83,639 

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

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

Off-balance sheet arrangements also include an interest rate swap, an interest rate floor, an interest rate collar (discussed
in Note 11 of this report) and the Companys Trust Preferred Securities (discussed in Note 10 of this report).



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



|18. | REGULATORY MATTERS
|--- | ------------------

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

To meet the capital adequacy requirements, Sterling Bancshares and the Bank must maintain minimum
capital amounts and ratios as defined in the regulations. Management believes, as of December 31, 2007 and 2006, that Sterling Bancshares and the Bank met all capital adequacy requirements to which they are subject.

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

The Companys consolidated and the Banks capital ratios are presented in the following table:



|                                         |  |                                           |         |       |                              |   |        |                                                                             |         |  |     |        |  |       |         |  |      |  
|---------------------------------------- |  | ----------------------------------------- | ------- | ----- | ---------------------------- | - | ------ | --------------------------------------------------------------------------- | ------- |  | --- | ------ |  | ----- | ------- |  | ---- | -
|                                         |  | Actual                                    |         |       | For CapitalAdequacy Purposes |   |        | To Be Categorizedas Well CapitalizedUnder PromptCorrective ActionProvisions |        
|                                         |  | Amount                                    |         | Ratio |                              |   | Amount |                                                                             | Ratio   |  |     | Amount |  | Ratio |        
|                                         |  | (In thousands, except percentage amounts) |        
|Consolidated:                            |  |                                           |         |       |                              |   |        |                                                                             |         |  |     |        |  |       |         |  |      |  
|As of December 31, 2007:                 |  |                                           |         |       |                              |   |        |                                                                             |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 454,030 |       | 11.1                         | % |        | $                                                                           | 327,180 |  | 8.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 369,965 |       | 9.1                          | % |        |                                                                             | 163,590 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 369,965 |       | 8.6                          | % |        |                                                                             | 172,366 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|                                         |  |                                           |         |       |                              |  
|As of December 31, 2006:                 |  |                                           |         |       |                              |   |        |                                                                             |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 407,079 |       | 10.7                         | % |        | $                                                                           | 303,871 |  | 8.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to risk weighted assets) |  |                                           | 327,991 |       | 8.6                          | % |        |                                                                             | 151,936 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|Tier 1 capital (to average assets)       |  |                                           | 327,991 |       | 8.1                          | % |        |                                                                             | 161,111 |  | 4.0 | %      |  |       | N/A     |  | N/A  |  
|                                         |  |                                           |         |       |                              |  
|Sterling Bank:                           |  |                                           |         |       |                              |   |        |                                                                             |         |  |     |        |  |       |         |  |      |  
|As of December 31, 2007:                 |  |                                           |         |       |                              |   |        |                                                                             |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 448,314 |       | 11.0                         | % |        | $                                                                           | 326,896 |  | 8.0 | %      |  | $     | 408,620 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 364,248 |       | 8.9                          | % |        |                                                                             | 163,448 |  | 4.0 | %      |  |       | 245,172 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 364,248 |       | 8.5                          | % |        |                                                                             | 172,193 |  | 4.0 | %      |  |       | 215,241 |  | 5.0  | %
|                                         |  |                                           |         |       |                              |  
|As of December 31, 2006:                 |  |                                           |         |       |                              |   |        |                                                                             |         |  |     |        |  |       |         |  |      |  
|Total capital (to risk weighted assets)  |  | $                                         | 401,511 |       | 10.6                         | % |        | $                                                                           | 303,449 |  | 8.0 | %      |  | $     | 379,312 |  | 10.0 | %
|Tier 1 capital (to risk weighted assets) |  |                                           | 322,423 |       | 8.5                          | % |        |                                                                             | 151,725 |  | 4.0 | %      |  |       | 227,587 |  | 6.0  | %
|Tier 1 capital (to average assets)       |  |                                           | 322,423 |       | 8.0                          | % |        |                                                                             | 160,879 |  | 4.0 | %      |  |       | 201,099 |  | 5.0  | %



F-35



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



On January 1, 2004, the Company deconsolidated the outstanding trust preferred securities from
its Consolidated Financial Statements. However, trust preferred securities are still considered in calculating the Companys Tier 1 capital ratios as permitted by the Federal Reserve rules. These rules, when fully transitioned and applicable on
March 31, 2009, will limit the aggregate amount of trust preferred securities and certain other capital elements to 25% of Tier 1 capital, net of goodwill. At December 31, 2007, the entire amount of the $80.3 million of trust preferred
securities outstanding would count as Tier 1 capital. The excess amount of trust preferred securities not qualifying for Tier 1 capital may be included in Tier 2 capital. This amount is limited to 50% of Tier 1 capital. Additionally, the final
rules provide that trust preferred securities no longer qualify for Tier 1 capital within 5 years of their maturity. Under the final transitioned rules, there would not be a material impact on the Companys consolidated capital ratios at
December 31, 2007.

Dividend restrictionsDividends paid by the Bank are subject to certain restrictions imposed by
regulatory agencies. Under these restrictions there was an aggregate of approximately $121 million available for payment of dividends at December 31, 2007 by the Bank. At December 31, 2007 the aggregate amount of dividends, which legally
could be paid without prior approval of various regulatory agencies, totaled approximately $40 million by the Bank.



|19. | SUBSEQUENT EVENTS (UNAUDITED)
|--- | -----------------------------

On February 8,
2008, the Company acquired ten branches located in the Dallas and Fort Worth areas from First Horizon National Corp. (First Horizon) in a business combination accounted for using the purchase method of accounting. In addition to these
ten bank branches, the Company also agreed to acquire land from First Horizon for possible future Sterling banking centers in Lewisville, Arlington and Fort Worth. This transaction allows the Company to achieve a critical presence in Dallas and an
entry into the growing Fort Worth market. The Company acquired approximately $67 million in total assets, including approximately $52 million in loans and assumed selected deposit accounts of approximately $88 million for a premium of $1.7 million.
The purchase price allocation is expected be finalized during the first quarter of 2008.



|20. | DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
|--- | -----------------------------------------------------

The estimated fair values of financial instruments were determined by management as of December 31, 2007 and 2006, 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The carrying amount is a reasonable estimate of fair value.

Securities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 bought with the anticipation of sale in
the near term are carried at fair market value which equals quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



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.

Subordinated DebtThe subordinated debt is carried at fair value
because this borrowing is hedged fully by an interest rate swap that reprices at market rates on a quarterly basis.

Junior
Subordinated Debt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 subordinated debentures.

Other Borrowed FundsThe carrying amount is a reasonable estimate of fair value because these borrowings reprice at market rates
generally within ninety days.

DerivativesFair value is defined as the amount that the Company would receive or pay to
terminate the contracts at the reporting date. Market quotes are used to value the instruments.

Off-Balance Sheet Financial
Instruments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. These amounts were not significant at the reporting dates.



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##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



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



|                                |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|------------------------------- |  | -------------- | --------- | - | ------------------- | - | --------- | -------------- |  | - | ------------------- | - |  | - | --------- | -
|                                |  | December 31,   |          
|                                |  | 2007           |           |   | 2006                |  
|                                |  | CarryingAmount |           |   | EstimatedFair Value |   |           | CarryingAmount |  |   | EstimatedFair Value |  
|Financial assets:               |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|Cash and short-term investments |  | $              | 133,670   |   |                     | $ | 133,670   |                |  | $ | 134,973             |   |  | $ | 134,973   |  
|Trading assets                  |  |                |          |   |                     |   |          |                |  |   |                    |   |  |   |          |  
|Available-for-sale securities   |  |                | 476,690   |   |                     |   | 476,690   |                |  |   | 409,351             |   |  |   | 409,351   |  
|Held-to-maturity securities     |  |                | 180,086   |   |                     |   | 179,663   |                |  |   | 164,263             |   |  |   | 163,535   |  
|Loans held for sale             |  |                | 78,447    |   |                     |   | 78,447    |                |  |   | 54,722              |   |  |   | 54,722    |  
|Loans held for investment       |  |                | 3,339,837 |   |                     |   | 3,414,162 |                |  |   | 3,077,845           |   |  |   | 3,130,393 |  
|Less: allowance for loan losses |  |                | (34,446   | ) |                     |   | (34,446   | )              |  |   | (32,027             | ) |  |   | (32,027   | )
|                                |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|Total                           |  | $              | 4,174,284 |   |                     | $ | 4,248,186 |                |  | $ | 3,809,127           |   |  | $ | 3,860,947 |  
|                                |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|Financial liabilities:          |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|Deposits                        |  | $              | 3,673,711 |   |                     | $ | 3,656,002 |                |  | $ | 3,334,611           |   |  | $ | 3,226,277 |  
|Junior subordinated debt        |  |                | 82,734    |   |                     |   | 82,734    |                |  |   | 56,959              |   |  |   | 56,959    |  
|Subordinated debt               |  |                | 48,694    |   |                     |   | 48,694    |                |  |   | 46,135              |   |  |   | 46,135    |  
|Interest rate swap              |  |                | 1,274     |   |                     |   | 1,274     |                |  |   | 3,827               |   |  |   | 3,827     |  
|Other borrowed funds            |  |                | 197,147   |   |                     |   | 196,915   |                |  |   | 220,675             |   |  |   | 220,672   |  
|                                |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  
|Total                           |  | $              | 4,003,560 |   |                     | $ | 3,985,619 |                |  | $ | 3,662,207           |   |  | $ | 3,553,870 |  
|                                |  |                |           |   |                     |   |           |                |  |   |                     |   |  |   |           |  



|21. | 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):



|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|----------------------------------------------------- |  | ------------- | ------ | ------------ | - | ------------- |  | ------------ | ------ | ------------- | - | ------------ |  | ------------- | ------ | ------------ | - | ------ |  | - | ------ |  | - | ------
|                                                      |  | 2007          |        | 2006        
|                                                      |  | FourthQuarter |        | ThirdQuarter |   | SecondQuarter |  | FirstQuarter |        | FourthQuarter |   | ThirdQuarter |  | SecondQuarter |        | FirstQuarter
|Interest income                                       |  | $             | 73,854 |              | $ | 74,159        |  | $            | 72,382 |               | $ | 67,854       |  | $             | 69,863 |              | $ | 64,771 |  | $ | 62,185 |  | $ | 57,912
|Interest expense                                      |  |               | 26,692 |              |   | 27,064        |  |              | 25,604 |               |   | 23,265       |  |               | 24,467 |              |   | 21,866 |  |   | 19,372 |  |   | 17,220
|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Net interest income                                   |  |               | 47,162 |              |   | 47,095        |  |              | 46,778 |               |   | 44,589       |  |               | 45,396 |              |   | 42,905 |  |   | 42,813 |  |   | 40,692
|Provision for credit losses                           |  |               | 1,600  |              |   | 850           |  |              | 1,000  |               |   | 370          |  |               |       |              |   | 895    |  |   | 1,837  |  |   | 1,326 
|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Net interest income after provision for credit losses |  |               | 45,562 |              |   | 46,245        |  |              | 45,778 |               |   | 44,219       |  |               | 45,396 |              |   | 42,010 |  |   | 40,976 |  |   | 39,366
|Noninterest income                                    |  |               | 10,135 |              |   | 10,633        |  |              | 7,518  |               |   | 7,934        |  |               | 8,204  |              |   | 7,504  |  |   | 9,019  |  |   | 6,490 
|Noninterest expense                                   |  |               | 36,134 |              |   | 35,044        |  |              | 34,342 |               |   | 33,834       |  |               | 34,468 |              |   | 32,567 |  |   | 33,193 |  |   | 30,958
|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Income before income taxes                            |  |               | 19,563 |              |   | 21,834        |  |              | 18,954 |               |   | 18,319       |  |               | 19,132 |              |   | 16,947 |  |   | 16,802 |  |   | 14,898
|Provision for income taxes                            |  |               | 6,201  |              |   | 7,255         |  |              | 5,856  |               |   | 6,396        |  |               | 6,322  |              |   | 5,218  |  |   | 5,533  |  |   | 4,866 
|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Net income                                            |  | $             | 13,362 |              | $ | 14,579        |  | $            | 13,098 |               | $ | 11,923       |  | $             | 12,810 |              | $ | 11,729 |  | $ | 11,269 |  | $ | 10,032
|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Earnings per share:                                   |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Basic                                                 |  | $             | 0.18   |              | $ | 0.20          |  | $            | 0.18   |               | $ | 0.17         |  | $             | 0.18   |              | $ | 0.17   |  | $ | 0.17   |  | $ | 0.15  
|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Diluted                                               |  | $             | 0.18   |              | $ | 0.20          |  | $            | 0.18   |               | $ | 0.17         |  | $             | 0.18   |              | $ | 0.17   |  | $ | 0.16   |  | $ | 0.15  
|                                                      |  |               |        |              |   |               |  |              |        |               |   |              |  |               |        |              |   |        |  |   |        |  |   |       



F-38



---

##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



|22. | PARENT-ONLY FINANCIAL STATEMENTS
|--- | --------------------------------

STERLING
BANCSHARES, INC.

(Parent Company Only)

CONDENSED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

(In thousands)



|                                                        |  |      |         |   |      |   |         |  
|------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                        |  | 2007 |         |   | 2006 |  
|ASSETS                                                  |  |      |         |   |      |   |         |  
|Cash and cash equivalents                               |  | $    | 4,461   |   |      | $ | 1,582   |  
|Accrued interest receivable and other assets            |  |      | 2,660   |   |      |   | 4,839   |  
|Investment in subsidiaries                              |  |      | 554,798 |   |      |   | 458,973 |  
|Investment in Sterling Bancshares Capital Trusts        |  |      | 2,484   |   |      |   | 1,710   |  
|                                                        |  |      |         |   |      |   |         |  
|TOTAL ASSETS                                            |  | $    | 564,403 |   |      | $ | 467,104 |  
|                                                        |  |      |         |   |      |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                    |  |      |         |   |      |   |         |  
|LIABILITIES:                                            |  |      |         |   |      |   |         |  
|Accrued interest payable and other liabilities          |  | $    | 1,410   |   |      | $ | 860     |  
|Junior subordinated debt                                |  |      | 82,734  |   |      |   | 56,959  |  
|                                                        |  |      |         |   |      |   |         |  
|Total liabilities                                       |  |      | 84,144  |   |      |   | 57,819  |  
|                                                        |  |     
|COMMITMENTS AND CONTINGENCIES                           |  |      |         |   |      |   |         |  
|                                                        |  |     
|SHAREHOLDERS EQUITY:                                   |  |      |         |   |      |   |         |  
|Common stock                                            |  |      | 74,926  |   |      |   | 71,938  |  
|Capital surplus                                         |  |      | 110,367 |   |      |   | 80,927  |  
|Retained earnings                                       |  |      | 309,903 |   |      |   | 272,179 |  
|Treasury stock                                          |  |      | (20,493 | ) |      |   | (10,902 | )
|Accumulated other comprehensive gain (loss), net of tax |  |      | 5,556   |   |      |   | (4,857  | )
|                                                        |  |      |         |   |      |   |         |  
|Total shareholders equity                              |  |      | 480,259 |   |      |   | 409,285 |  
|                                                        |  |      |         |   |      |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY              |  | $    | 564,403 |   |      | $ | 467,104 |  
|                                                        |  |      |         |   |      |   |         |  



F-39



---

##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



STERLING BANCSHARES, INC.

(Parent Company Only)

CONDENSED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

(In thousands)



|                                                                                |  |      |        |      |   |         |      |  |   |        |  
|------------------------------------------------------------------------------- |  | ---- | ------ | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                |  | 2007 |        | 2006 |   |         | 2005 | 
|REVENUES:                                                                       |  |      |        |      |   |         |      |  |   |        |  
|Dividends received from bank subsidiaries                                       |  | $    | 25,495 |      | $ | 78,969  |      |  | $ | 47,170 |  
|Other income                                                                    |  |      | 191    |      |   | 173     |      |  |   | 203    |  
|                                                                                |  |      |        |      |   |         |      |  |   |        |  
|Total revenues                                                                  |  |      | 25,686 |      |   | 79,142  |      |  |   | 47,373 |  
|EXPENSES:                                                                       |  |      |        |      |   |         |      |  |   |        |  
|Interest expense:                                                               |  |      |        |      |   |         |      |  |   |        |  
|Junior subordinated debt                                                        |  |      | 6,239  |      |   | 5,571   |      |  |   | 6,933  |  
|General and administrative                                                      |  |      | 2,509  |      |   | 3,350   |      |  |   | 2,580  |  
|                                                                                |  |      |        |      |   |         |      |  |   |        |  
|Total expenses                                                                  |  |      | 8,748  |      |   | 8,921   |      |  |   | 9,513  |  
|Income before equity in undistributed earnings of subsidiaries and income taxes |  |      | 16,938 |      |   | 70,221  |      |  |   | 37,860 |  
|Equity in undistributed earnings of subsidiaries                                |  |      | 33,026 |      |   | (27,410 | )    |  |   | (4,891 | )
|                                                                                |  |      |        |      |   |         |      |  |   |        |  
|Income before income tax benefit                                                |  |      | 49,964 |      |   | 42,811  |      |  |   | 32,969 |  
|Income tax benefit                                                              |  |      | 2,998  |      |   | 3,029   |      |  |   | 3,253  |  
|                                                                                |  |      |        |      |   |         |      |  |   |        |  
|Net income                                                                      |  | $    | 52,962 |      | $ | 45,840  |      |  | $ | 36,222 |  
|                                                                                |  |      |        |      |   |         |      |  |   |        |  



F-40



---

##### Table of Contents

##### Index to Financial Statements

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



STERLING BANCSHARES, INC.

(Parent Company Only)

CONDENSED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

(In thousands)



|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                  |  | 2007 |         |   | 2006 |   |         | 2005 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Net income                                                                        |  | $    | 52,962  |   |      | $ | 45,840  |      |  | $ | 36,222  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |      |         |   |      |   |         |      |  |   |         |  
|Equity in undistributed earnings of subsidiary                                    |  |      | (33,026 | ) |      |   | 27,410  |      |  |   | 4,891   |  
|Change in operating assets and liabilities:                                       |  |      |         |   |      |   |         |      |  |   |         |  
|Accrued interest receivable and other assets                                      |  |      | 3,153   |   |      |   | 2,941   |      |  |   | 448     |  
|Accrued interest payable and other liabilities                                    |  |      | 8       |   |      |   | 948     |      |  |   | 180     |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                         |  |      | 23,097  |   |      |   | 77,139  |      |  |   | 41,741  |  
|                                                                                  |  |      |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Purchase of Partners Bank of Texas                                                |  |      | (25,319 | ) |      |   |        |      |  |   |        |  
|Purchase of BOTH, Inc.                                                            |  |      |        |   |      |   | (31,730 | )    |  |   |        |  
|Purchase of Prestonwood Bancshares, Inc.                                          |  |      |        |   |      |   |        |      |  |   | (34,638 | )
|Redemption of investment in Sterling Bancshares Capital Trust II                  |  |      |         |   |      |   | 889     |      |  |   |        |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                             |  |      | (25,319 | ) |      |   | (30,841 | )    |  |   | (34,638 | )
|                                                                                  |  |      |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |      |         |   |      |   |         |      |  |   |         |  
|Repurchase of common stock                                                        |  |      | (10,387 | ) |      |   | (8,918  | )    |  |   | (1,984  | )
|Proceeds from issuance of common stock                                            |  |      | 4,952   |   |      |   | 5,436   |      |  |   | 4,625   |  
|Payments of cash dividends                                                        |  |      | (15,238 | ) |      |   | (12,832 | )    |  |   | (10,865 | )
|Proceeds from the issuance of Statutory Trust IV                                  |  |      | 25,774  |   |      |   |        |      |  |   |        |  
|Redemption of junior subordinated debentures                                      |  |      |        |   |      |   | (29,639 | )    |  |   |        |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) financing activities                               |  |      | 5,101   |   |      |   | (45,953 | )    |  |   | (8,224  | )
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              |  |      | 2,879   |   |      |   | 345     |      |  |   | (1,121  | )
|                                                                                  |  |      |        
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                    |  |      | 1,582   |   |      |   | 1,237   |      |  |   | 2,358   |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                          |  | $    | 4,461   |   |      | $ | 1,582   |      |  | $ | 1,237   |  
|                                                                                  |  |      |         |   |      |   |         |      |  |   |         |  



F-41