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

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

                                   FORM 10-K
  (Mark One)
    [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
        SECURITIES EXCHANGE ACT OF 1934

                    For fiscal year ended December 31, 2000

                                       OR

    [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934

             For the transition period from                     TO

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

                         Commission File Number 0-20750

                           STERLING BANCSHARES, INC.
             (Exact name of registrant as specified in its charter)

           TEXAS                                                 74-2175590
(State or other jurisdiction of                              (I.R.S. employer
 Incorporation or organization)                           Identification number)

     15000 NORTHWEST FREEWAY                                      77040
         HOUSTON, TEXAS                                        (Zip Code)
  (Address of principal executive offices)

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

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

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


          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

       TITLE OF EACH CLASS             SHARES OUTSTANDING AT DECEMBER 31, 2000
   ---------------------------         ---------------------------------------
   Common Stock, $1 Par Value                          26,230,607

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

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days:  Yes [X]  No [_]

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

    The aggregate market value of the registrant's Common Stock held by non-
affiliates as of March 5, 2001, was $398,889,760  based on the closing sales
price of $18.1875 on such date.

    As of March 5, 2001, registrant had outstanding 26,292,373 shares of Common
Stock, $1.00 par value.

    DOCUMENTS INCORPORATED BY REFERENCE:  Proxy Statement for the Annual Meeting
of Shareholders to be held April 23, 2001 (Part III)

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PART -- I

ITEM 1 -- BUSINESS

GENERAL

Sterling Bancshares, Inc. (the "Company"), headquartered in Houston, Texas, is a
bank holding company that provides commercial and retail banking services
primarily in the Houston metropolitan area through the banking offices of
Sterling Bank, a banking association chartered under the laws of the State of
Texas (the "Bank").  The Company also provides mortgage banking services through
its 80 percent owned subsidiary, Sterling Capital Mortgage Company ("SCMC").

The Company's principal executive offices are located at 15000 Northwest
Freeway, Houston, Texas, 77040 and its telephone number is (713) 466-8300.  The
Company 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.  The Company completed its initial public offering on October
22, 1992.

The Company had approximately 743 and 351 full time equivalent employees,
including 189 and 36 officers, in its commercial banking and mortgage banking
segments, respectively, as of December 31, 2000.  At December 31, 2000, the
Company had total assets of $1.9 billion, deposits of $1.6 billion, and
shareholders' equity of $159.1 million.

The Company has two operating segments: commercial banking and mortgage banking.
The segments are managed separately as they require different marketing
strategies and offer different products and services.  See Note T to the
Consolidated Financial Statements for summarized financial information by
operating segment.

COMMERCIAL BANKING

The Bank provides a wide range of retail 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, the Bank facilitates sales of
brokerage, mutual fund, and insurance products.  The deposits of the Bank are
insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation ("FDIC").

The primary lending focus of the Bank is on commercial loans and owner-occupied
real estate loans to local businesses with annual sales ranging from $300,000 to
$30 million.  Typically, the Bank's customers have financing requirements
between $50,000 and $500,000.  The Bank does not seek loans of more than $2
million but will consider larger lending relationships which involve exceptional
levels of credit quality.  The Bank's credit range, while well below its legal
lending limit of $20 million, allows for greater diversity in the loan
portfolio, less competition from large banks, and better pricing opportunities.

BUSINESS BANKING STRATEGY. Under its business banking strategy, the Bank focuses
on a broad line of financial products and services to small and medium-sized
businesses through full service banking offices.  Each banking office has senior
management with extensive lending experience.  These managers exercise
substantial authority over credit and pricing decisions, subject to loan
committee approval for larger credits.  This decentralized management approach,
coupled with continuity of service by the same staff members, enables the Bank
to develop long-term customer relationships, maintain high quality service and
respond quickly to customer needs.  The Company believes that its emphasis on
local relationship banking, together with a conservative approach to lending,
are important factors in the success and growth of the Bank.

The Company and the Bank have maintained a strong community orientation by,
among other things, supporting the active participation of staff members in
local charitable, civic, school, religious and community development activities.
Each banking office may also appoint selected customers to a business
development board that assists in introducing prospective customers to the Bank
and in developing or improving products and services to meet customer needs. As
a result of the development of broad banking relationships with customers and
the

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convenience and service of the Company's twenty-four banking offices, lending
and investing activities are funded primarily by core deposits, over one-third
of which are noninterest bearing demand deposits.

The Bank centralizes operational and support functions that are transparent to
customers in order to achieve consistency and cost efficiencies in the delivery
of products and services by each banking office.  The central office provides
services such as data processing, bookkeeping, accounting, treasury management,
loan administration, loan review, compliance, risk management, and internal
auditing to enhance their delivery of quality service.  The Company also
provides overall direction in the areas of credit policy and administration,
strategic planning, marketing, investment portfolio management, and other
financial and administrative services.  The banking offices work closely with
the Company to develop new products and services needed by their customers and
to introduce enhancements to existing products and services.

MORTGAGE BANKING

The Company originates, sells and services single family residential mortgages
through its 80 percent ownership of SCMC. SCMC has production offices in Texas
and nine other states, with corporate offices in Houston, Texas and Seattle,
Washington. The typical mortgage originated by SCMC is approximately $110,000. A
substantial portion of SCMC's loan production is generated through joint
ventures known as affiliated business arrangements with established home
builders and realtor-based organizations. SCMC is an approved Government
National Mortgage Association ("GNMA") issuer of mortgage-backed securities.
SCMC is also an approved Federal National Mortgage Association ("FNMA") and
Federal Home Loan Mortgage Corporation ("FHLMC") seller/servicer and a HUD-
Approved Title II nonsupervised mortgagee. During 2000, SCMC funded
approximately $1.4 billion in residential mortgage loans.

EXPANSION

The Company's growth strategy has been concentrated on increasing its banking
presence in the greater Houston area and on entering both the Dallas and San
Antonio markets.  The Company has grown through a combination of internal
growth, mergers and acquisitions, and the opening of new banking offices.

DE NOVO OFFICES. In December 2000, the Company opened a new banking office in
Dallas.  This is the Company's first office outside of the Houston market.

In April 2000, the Company opened a new banking office in Bellaire.  In
conjunction with the opening of this office, the Company's Board designated
50,000 shares of Series H convertible preferred stock and authorized the
offering and sale of such shares to investors who may assist in the business
development efforts of the office.  A total of 39,000 of the preferred shares
were actually sold.  These preferred shares will be convertible into a maximum
of 48,750 shares of the Company's common stock.  The conversion ratio is
dependent upon the Bellaire office meeting certain performance goals.

On May 13, 1998, the Company opened its seventeenth banking office in Fort Bend
County.  In conjunction with the opening of this office, in April 1998, the
Company's Board designated two additional series of convertible preferred stock
consisting of 30,000 shares of Series F convertible preferred stock and 50,000
shares of Series G convertible preferred stock.  Shares of Series F and Series G
convertible preferred stock were offered and a total of 61,500 shares were sold
to prospective investors whom the Company believes will be helpful in the
development of the office.  In September 2000, the Series G convertible
preferred stock was converted into 45,000 shares of the Company's common stock.
The currently outstanding 1,000 shares of Series F convertible preferred stock
will automatically convert into 1,000 shares of common stock on May 18, 2001.

In January 1998, the Company opened a new banking office on Spencer Highway in
Pasadena.  In conjunction with the opening of this office, the Company's Board
designated 50,000 shares of Series E convertible preferred stock and authorized
the offering and sale of such shares to investors who may assist in the business

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development efforts of the office.  A total of 27,000 of the preferred shares
were actually sold.  In February 2000, these preferred shares were converted
into 33,750 shares of the Company's common stock as a result of the Spencer
Highway office achieving meeting certain performance goals.

MERGERS AND ACQUISITIONS. On March 22, 2001, the Company acquired CaminoReal
Bancshares of Texas, Inc. ("CaminoReal") and its subsidiary bank, CaminoReal
Bank, National Association, for an aggregate cash purchase price of $51.8
million. CaminoReal Bank has four banking offices in San Antonio, Texas and four
banking offices in the south Texas cities of Eagle Pass, Carrizo Springs,
Crystal City and Pearsall. The Company anticipates completing operational
integration of CaminoReal Bank and Sterling Bank in the second quarter of 2001.

On March 1, 2001, the Company entered a definitive agreement to acquire Lone
Star Bancorporation, Inc. and its subsidiary bank, Lone Star Bank, headquartered
in Houston, Texas. The Company will issue approximately 1.76 million shares of
its common stock to the shareholders of Lone Star Bancorporation and assume up
to $2 million in indebtedness. The merger is subject to customary closing
conditions including (i) the qualification of the transaction for pooling of
accounting treatment and the Company's receipt of an opinion of Lone Star
Bancorporation's accountants satisfactory to the Company confirming the
availability of pooling of accounting, (ii) receipt of necessary regulatory
approvals and consents from applicable regulatory agencies, which approvals may
not impose conditions or restrictions that would, in the Company's good faith
judgment, adversely impact the transaction, and (iii) approval of the
shareholders of Lone Star Bancorporation. Lone Star Bancorporation is privately
held and is the bank holding company of Lone Star Bank, which operates four
banking offices in the Houston metropolitan area. As of December 31, 2000, Lone
Star Bank had total assets of $152 million, loans of $117 million and deposits
of $141 million.

On June 1, 1999, the Company acquired B.O.A. Bancshares, Inc. ("B.O.A.") and its
subsidiary Houston Commerce Bank in exchange for 1,854,600 shares of the
Company's common stock.  The acquisition of B.O.A. added $115 million in total
assets and $103 million in total deposits to the Company's balance sheet.
Houston Commerce Bank operated three locations in Houston.  During October 1999,
the Company merged Houston Commerce Bank into Sterling Bank.

On November 20, 1998, the Company acquired Hometown Bancshares, Inc.
("Hometown"), which was the bank holding company for Clear Lake National Bank,
in a stock-for-stock merger. The acquisition of Hometown added $92 million in
total assets and $84 million in total deposits to the Company's balance sheet.
Clear Lake National Bank operated two locations in the Clear Lake area of
southeast Houston.  During April 1999, the Company merged Clear Lake National
Bank into Sterling Bank.

On June 30, 1998, Humble National Bank ("Humble") was acquired by the Company in
a stock-for-stock merger. The acquisition of Humble added $54 million in total
assets and $49 million in total deposits to the Company's balance sheet.  Humble
operated a full service banking office in the Humble area of northeast Houston.
During August 1998, the Company merged Humble into Sterling Bank.

The Company will continue to seek acquisition and new office opportunities when
available and consistent with its business banking philosophy.  To accommodate
further growth, the Company will continue to upgrade its central office data
processing and telecommunication systems and facilities to provide the Company
with the technological capacity necessary to meet the needs and expectations of
its customers.

COMPETITION

The Company engages in highly competitive activities.  Each activity and market
served involves competition with other banks and mortgage companies, as well as
with non-banking and non-financial enterprises that offer financial products and
services that compete directly with the Company's product and service offerings.
The Company actively competes with other banks, mortgage companies and other
financial service companies in its efforts to obtain deposits and make loans, in
the scope and types of services offered, in interest rates paid on time deposits
and charged on loans, and in other aspects of banking.

In addition to competing with other banks and mortgage companies, the Company
competes with other financial institutions engaged in the business of making
loans or accepting deposits, such as savings and loan associations, credit
unions, industrial loan associations, insurance companies, small loan companies,
finance companies, real estate investment trusts, certain governmental agencies,
credit card organizations and other enterprises.  In recent years, competition
for money market accounts from securities brokers has also intensified.
Additional competition for deposits comes from government and private issues of
debt obligations and other investment alternatives for depositors such as money
market funds.  The Bank also competes with a variety of other institutions in
providing brokerage services.

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SUPERVISION AND REGULATION

References herein to applicable statutes and regulations are brief summaries, do
not purport to be complete and are qualified in their entirety by reference to
such statutes and regulations.

THE BANK HOLDING COMPANY

The Company and its second tier holding company, Sterling Bancorporation, Inc.,
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 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.

PERMISSIBLE ACTIVITIES

As a bank holding company, the activities of the Company, as well as the
activities of entities which are controlled by the Company or of which the
Company owns 5% or more of the voting securities, are limited by the BHCA 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 recently enacted Gramm-Leach-Bliley Act, however, amended
the BHCA and granted certain expanded powers to bank holding companies.  See
discussion below under "Recently Enacted Legislative and Regulatory Changes."
In approving acquisitions by the Company of entities engaged in banking-related
activities, the Federal Reserve Board considers a number of factors, including
the expected benefits to the public, such as greater convenience and increased
competition or gains in efficiency, which are weighted against the risks of
possible adverse effects, such as an attempt to monopolize the business of
banking, undue concentration of resources, decreased or unfair competition,
conflicts of interest, or unsound banking practices.

MORTGAGE COMPANY

SCMC is an approved GNMA issuer of mortgage-backed securities.  SCMC is also an
approved FNMA and FHLMC seller/servicer and a HUD-Approved Title II
nonsupervised mortgagee.  As such, SCMC must operate under certain guidelines
set forth by GNMA, FNMA, FHLMC and HUD.  As a majority owned subsidiary of a
bank holding company, SCMC is also subject to the regulatory authority of the
FDIC, the Texas Department of Banking and the Federal Reserve Board.

NON-BANKING ACTIVITIES

The BHCA sets forth exceptions to its general prohibition against bank holding
company ownership of voting shares in any company engaged in non-banking
activities.  The exceptions include certain activities exempt based upon the
type of activity and those determined by the Federal Reserve Board to be closely
related to banking or managing or controlling banks.  The Economic Growth and
Regulatory Paperwork Reduction Act of 1996 ("EGRPRA"), streamlined the non-
banking activities application process for bank holding companies which qualify
as well-capitalized and well-managed.  Also, see discussion of the Gramm-Leach-
Bliley Act, which amends certain portions of the BHCA, under the "Recently
Enacted Legislative and Regulatory Changes" caption below.


RECENTLY ENACTED LEGISLATIVE AND REGULATORY CHANGES

The Gramm-Leach-Bliley ("G-L-B") Act, which became effective in 2000, 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

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have filed a declaration with the Federal Reserve Board electing to be a
financial holding company. Among the new activities that will be permitted 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.

The G-L-B Act also imposes new requirements on financial institutions with
respect to customer privacy.  The G-L-B 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.  Financial institutions, however, will be required to
comply with state law if it is more protective of customer privacy than the G-L-
B Act.  The privacy provisions will become effective on July 1, 2001.

The G-L-B Act contains a variety of other provisions including a prohibition
against ATM surcharges unless the customer has first been provided notice of the
imposition and amount of the fee.

The Company has not filed on election to be a financial holding company. At this
time, the Company is unable to predict the impact of the authorized affiliations
and new financial activities permitted by the G-L-B Act on its operations. The
Company is actively addressing the customer privacy requirements of the G-L-B
Act and fully expects to be in compliance on the effective date.

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 money 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.

On July 10, 1995, the four federal agencies that regulate banks and savings
associations (FDIC, Federal Reserve Board, the Office of the Comptroller of the
Currency and the Office of Thrift Supervision) jointly issued guidelines for
safe and sound banking operations (Interagency Guidelines Establishing Standards
for Safety and Soundness) 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.  The policy
provides that bank holding companies should not maintain a level of cash
dividends that undermines the bank holding 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 Bank is subject to the capital adequacy requirements promulgated by the FDIC
and the Texas Department of Banking.  In addition, the Federal Reserve Board
monitors the capital adequacy of bank holding companies.

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The Federal Reserve Board has adopted a system using risk-based capital adequacy
guidelines to evaluate the capital adequacy of bank holding companies.  Under
the risk-based capital guidelines, different categories of assets 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-related" asset base. Certain off balance sheet items are added
to the risk-weighted asset base by converting them to a balance sheet equivalent
and assigning to them the appropriate risk weight.  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, perpetual preferred stock, and minority interest in
consolidated subsidiaries. "Tier 2" capital includes, with certain limitations,
certain forms of perpetual preferred stock, as well as maturing capital
instruments and the reserve for credit losses.  The guidelines require
achievement of 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).  At December 31, 2000, the Company's ratios of "Tier 1" and "Total"
capital-to-risk-weighted assets were 10.78%, and 11.51%, respectively.

In addition to the risk-based capital guidelines, the Federal Reserve Board and
the FDIC have adopted the use of a minimum "Tier 1" leverage ratio as an
additional tool to evaluate the capital adequacy of banks and bank holding
companies. The banking organization's "Tier 1" leverage ratio is defined to be a
company's "Tier 1" capital divided by its average total consolidated assets. The
leverage ratio adopted by the federal banking agencies requires a minimum 3.0%
"Tier 1" capital to total assets ratio for institutions with the highest
regulatory rating.  All other institutions will be expected to maintain a
leverage ratio of 4.0% to 5.0%.   The Company's leverage ratio at December 31,
2000 of 9.39% significantly exceeded the regulatory minimum.

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 institution 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.

AUDIT REPORTS

The regulations promulgated by the FDIC to implement FDICIA subjects depository
institutions with assets of $500 million or more to certain audit and reporting
requirements.  FDICIA requires insured institutions to submit annual audit
reports prepared by independent auditors to federal and state regulators.  The
audit report of the institution's holding company can be used to satisfy this
requirement.  Auditors must apply procedures agreed to by the FDIC to determine
compliance by the institution or holding company with legal requirements
designated by FDICIA.  The annual audit report must include financial statements
prepared in accordance with generally accepted accounting principles, statements
concerning management's responsibility for the financial statements and internal
controls designated by the FDIC, and an attestation by the auditor regarding the
statements of management.  For certain large institutions, independent auditors
may be required to review quarterly financial statements.  FDICIA requires that
independent audit committees be formed, consisting solely of outside directors.
The Company has an audit committee comprised of outside directors with at least
one certified public accountant and, therefore, is in compliance with the
requirements for large institutions.

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 any voting shares of any bank, if after
such acquisition it would own or control, directly or indirectly, more that 5%
of the voting shares of such bank.  In approving bank acquisitions, the Federal
Reserve Board considers the financial and managerial resources and future
prospects of the bank holding company and the banks concerned, the convenience
and needs of the communities to be served, and various competitive factors. The
Attorney General of the United

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States may, within 30 days after approval of an acquisition by the Federal
Reserve Board, bring an action challenging such acquisition under the federal
antitrust laws, in which case the effectiveness of such approval is stayed
pending a final ruling by the courts.

COMMUNITY REINVESTMENT ACT

The Community Reinvestment Act of 1977 ("CRA") and the regulations promulgated
by the FDIC to implement 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. In 1995, the bank
regulatory agencies adopted final regulations for implementing CRA.  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 its most recent examination, Sterling Bank has a satisfactory CRA
rating.

INTERSTATE BANKING

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Branching Act") increased the ease and likelihood of interstate
branching throughout much of the United States.  The Interstate Branching Act
removes state law barriers to acquisitions in all states and allows multi-state
banking operations to merge into a single bank with interstate branches.
Interstate banking and branching authority will be subject to certain conditions
and restrictions, such as capital adequacy, management and CRA compliance.  The
Interstate Branching Act preempts existing barriers that restrict entry into all
states, such as regional compacts and reciprocity agreements, thus creating
opportunities for expansion into markets that were previously closed.  Under the
Interstate Branching Act, bank holding companies are now able to acquire banks
in any state, subject to certain conditions.  Banks acquired pursuant to this
authority may subsequently be converted to branches.  Interstate branching is
permitted by allowing banks to merge across state lines to form a single
institution.  Interstate merger transactions can be used to consolidate existing
multi-state operations or to acquire new branches. A bank may establish a new
branch as its initial entry into a state only if the state has authorized de
novo branching.  In addition, out-of-state banks may merge with a single branch
of a bank if the state has authorized such a transaction. The Federal Reserve
Board, however, will only allow the acquisition by a bank holding company of an
interest in any bank located in another state if the statutory laws of the state
in which the target bank is located expressly authorize such acquisitions.  The
interstate branching provisions became effective on June 1, 1997, unless a state
took action before that time.  Texas elected to "opt out" of the Interstate
Branching Act. Despite Texas' having opted out of the Interstate Branching Act,
the Texas Banking Act permits, in certain circumstances, out-of-state bank
holding companies to acquire certain existing banks and bank holding companies
in Texas.

STERLING BANK

Sterling Bank is a Texas-chartered banking association.  The Bank's deposits are
insured by the FDIC.  Therefore, the Bank is subject to supervision and
regulation by both the Texas Department of Banking and the FDIC.  Pursuant to
such regulation, the Bank is subject to special restrictions, supervisory
requirements and potential enforcement actions.  Sterling Bank is not a member
of the Federal Reserve System; however, the Federal Reserve Board also has
supervisory authority that directly affects the Bank.  Sterling Bank is a member
of the Federal Home Loan Bank and, therefore, is also subject to compliance with
its requirements.

PERMISSIBLE ACTIVITIES FOR STATE-CHARTERED INSTITUTIONS

The Texas Constitution provides that a Texas-chartered bank has the same rights
and privileges that are or may be granted to national banks domiciled in Texas.
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

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applicable capital requirements and the FDIC determines that the activity poses
no significant risk to the Bank Insurance Fund ("BIF").

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 "Commissioner").  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. There are no federal
limitations on the ability of insured non-member state banks to branch across
state lines; however, such branching would be subject to applicable state law
restrictions.

Restrictions on Subsidiary Banks

Dividends paid by the Bank are the primary source of the Company's cash flow.
Although the Bank elected in August 1997 to temporarily suspend the payment of
dividends to the Company and to use the proceeds from the issuance of $28.75
million of trust preferred securities by Sterling Bancshares Capital Trust I to
meet the Company's current cash flow needs, the Bank is expected to provide
substantially all of the Company's cash flow in the foreseeable future.  Under
federal law, the Bank may not pay a dividend that results in an
"undercapitalized" situation.  At December 31, 2000, there was an aggregate of
approximately $72.5 million available for the payment of dividends by the Bank
to the Company without prior regulatory approval.

Other requirements in 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 every 12 months. The FDIC may, however, accept the result of a
Texas Department of Banking examination in lieu of conducting an independent
examination.  FDICIA authorizes the FDIC to assess the institution for its costs
of conducting the examinations.

The Commissioner also conducts examinations annually, unless additional
examinations are deemed necessary to safeguard the interests of shareholders,
depositors and creditors. The Commissioner may accept the results of a federal
examination in lieu of conducting an independent examination.  However, since
the total assets of the Bank exceed $1 billion, the FDIC and the Texas
Department of Banking jointly examine the Bank on an annual basis.

Deposit Insurance Assessments

The FDIC assesses deposit insurance premiums on all banks in order to adequately
fund the BIF so as to resolve any insured institution that is declared insolvent
by its primary regulator.  The FDIC has established a risk-based deposit
insurance premium system to calculate a depository institution's semi-annual
deposit insurance assessment.  The FDIC's semi-annual assessment is based upon
the designated reserve ratio for the deposit insurance fund and the probability
and extent to which the deposit insurance fund will incur a loss with respect to
the institution.  In addition, the FDIC can impose special assessments to cover
the cost of borrowings from the U.S. Treasury, the Federal Financing Bank, and
BIF member banks.

The FDIC established a process for raising or lowering all rates for insured
institutions semi-annually if conditions warrant a change.  Under this new
system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only 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.

                                       9
<PAGE>

On September 30, 1996, then President Clinton signed into law an act that
contained a comprehensive approach to recapitalizing the Savings Association
Insurance Fund ("SAIF") and to assure the payment of the Financing Corporation's
("FICO") bond obligations.  Under this act, banks insured under the BIF are
required to pay a portion of the interest due on bonds that were issued by FICO
to help shore up the ailing Federal Savings and Loan Insurance Corporation in
1987.  With regard to the assessment for the FICO obligation, the current BIF
and SAIF rate is .0196% of deposits.

Expanding Enforcement Authority

One of the major additional impacts imposed on the banking industry by FDICIA is
the increased ability of banking regulators to monitor the activities of banks
and their holding companies. In addition, the Federal Reserve Board and FDIC
have extensive authority to police unsafe or unsound practices and violations of
applicable laws and regulations by depository institutions and their holding
companies. For example, the FDIC may terminate the deposit insurance of any
institution which it determines has engaged in an unsafe or unsound practice.
The agencies can also assess civil money penalties, issue cease and desist or
removal orders, seek injunctions, and publicly disclose such actions.  FDICIA,
FIRREA and other laws have expanded the agencies' authority in recent years, and
the agencies have not yet fully tested the limits of their powers.

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.  The nature of future monetary policies and the effect of such
policies on the business and earnings of the Company and its subsidiaries cannot
be predicted.

Consumer Laws and Regulations

In addition to the banking laws and regulations discussed above, 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, and the Fair Housing Act.
These laws and regulations mandate certain disclosure requirements and regulate
the manner in which financial institutions must deal with customers when taking
deposits or making loans to such customers.  The Bank must comply with the
applicable provisions of these consumer protection laws and regulations as part
of their ongoing customer relations.   Also, see discussion of the consumer
privacy protection provision of the Gramm-Leach-Bliley Act under the "Recently
Enacted Legislative and Regulatory Changes" caption above.

                                       10
<PAGE>

ITEM 2 -- PROPERTIES

The principal executive offices of the Company and the Bank, as well as the
Company's management information systems, are located at 15000 Northwest
Freeway, Houston, Texas, 77040, in a building owned by the Bank.  In addition to
its principal office, the Company operates the following locations:


<TABLE>
<CAPTION>

                                                            OWNED          LEASED           TOTAL
                                                        ------------    ------------    ------------
<S>                                                     <C>             <C>             <C>
Banking offices in the Houston metropolitan area             12              11              23
Banking offices in the Dallas metropolitan area                               1               1
Central department offices                                    1               2               3
Mortgage production offices
   Arizona                                                                    5               5
   Colorado                                                                   1               1
   Illinois                                                                   1               1
   Nevada                                                                     1               1
   Oregon                                                                     3               3
   Texas                                                                     11              11
   Virginia                                                                   1               1
   Washington                                                                 2               2
                                                         ------           -----           -----
                Total                                        13              39              52
                                                         ======           =====           =====
</TABLE>


ITEM 3 -- LEGAL PROCEEDINGS

Neither the Company nor any of its subsidiaries is presently involved in any
material legal proceedings.

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

None.

                                       11
<PAGE>

PART -- II

ITEM 5 -- MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

The Company's stock trades through the NASDAQ Stock Market under the symbol
SBIB.  The following table sets forth the high and low closing stock prices of
the Company's common stock, as quoted on the NASDAQ Stock Market, and the
dividends paid thereon for each quarter of the last two fiscal years.  This
information has been restated to reflect all stock splits occurring prior to the
issuance of this report.

<TABLE>
<CAPTION>

2000                    HIGH         LOW          DIVIDEND
                       ------       ------        --------
<S>                    <C>          <C>           <C>
  First quarter        $10.94       $ 8.72         $0.050
  Second quarter        11.88         9.50         $0.050
  Third quarter         15.94        10.18         $0.050
  Fourth quarter        20.13        14.50         $0.050

1999
  First quarter        $15.06       $10.38         $0.045
  Second quarter        13.38        10.25         $0.045
  Third quarter         14.38        11.13         $0.045
  Fourth quarter        13.38        10.97         $0.045
</TABLE>

On January 22, 2001, the Company's Board of Directors declared a quarterly cash
dividend of $0.055 per share payable on February 17, 2001, to shareholders of
record on February 2, 2001.  The Company intends to continue to pay a dividend
at the rate of $0.055 per share quarterly throughout 2001.

On January 24, 2000, the Company's Board of Directors declared a quarterly cash
dividend of $0.050 per share payable on February 24, 2000, to shareholders of
record on February 10, 2000.

On January 25, 1999, the Company's Board of Directors declared a quarterly cash
dividend of $0.045 per share payable on February 22, 1999, to shareholders of
record on February 5, 1999.

On January 26, 1998, the Company's Board of Directors declared a three-for-two
stock split (effected as a 50% stock dividend) of the Company's common stock
distributed on February 20, 1998, to shareholders of record on February 6, 1998.
Concurrently with the 1998 stock split, the Company declared a quarterly $0.04
cash dividend per share (computed on an "after-split" basis) payable on February
20, 1998, to shareholders of record on February 6, 1998.

As of February 2, 2001, there were 853 shareholders of record of common stock.
The number of beneficial shareholders is unknown to the Company at this time.

In April 2000, the Company issued 39,000 shares of its Series H convertible
preferred stock in a private offering exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933. The shares of Series H convertible
preferred stock were sold at $9.875 per share for an aggregate offering of
$385,125. The shares of the Series H convertible preferred stock are convertible
into common stock dependent upon the Company's Bellaire banking office meeting
certain performance goals. The conversion ratio ranges from 1.25 shares of
common stock if the performance goals are met prior to April 3, 2002 to 1.1
shares of common stock if the performance goals are met prior to April 3, 2003.
After April 3, 2003, each share of Series H convertible preferred stock will
automatically convert into one share of common stock.

DESCRIPTION OF CAPITAL STOCK

AUTHORIZED CAPITAL STOCK

The authorized capital stock of the Company consists of (i) 50,000,000 shares of
Common Stock, $1.00 per share par value, of which 26,230,607 shares were issued
and outstanding as of December 31, 2000 and (ii) 1,000,000 shares of Preferred
Stock, $1.00 per share par value ("Preferred Stock"), issuable in series, of
which 11,500 shares of Series F and 39,000 shares of Series H Convertible
Preferred Stock were issued and outstanding as of December 31, 2000.  All prior
series of Preferred Stock have been converted into shares of common stock in
accordance with the relative rights and preferences of each such series.  As of
December 31,

                                       12
<PAGE>

2000, an additional 588,496 shares of Common Stock were issuable upon exercise
of the Company's vested outstanding employee stock options and pursuant to
outstanding subscriptions under the Company's Employee Stock Purchase Plan.

The following discussion of the terms and provisions of the Company's capital
stock is qualified in its entirety by reference to the Company's Articles of
Incorporation and Bylaws, which were previously filed as exhibits.

COMMON STOCK

All outstanding shares of Common Stock are fully paid and nonassessable.  There
are no preemptive, conversion, subscription, redemption or repurchase rights
associated with shares of Common Stock, except as exist under the 1994 Incentive
Stock Option Plan and the 1994 Employee Stock Purchase Plan.  Each holder of
shares of Common Stock is entitled to one vote for each share held of record as
to all matters requiring a shareholder vote.  Holders of shares of Common Stock
are not entitled to cumulative voting rights in the election of directors.  Upon
the dissolution of the Company, the holders of Common Stock would be entitled to
participate ratably in the assets available for distribution after satisfaction
of the claims of creditors of the Company and of holders of any series of
Preferred Stock having a liquidation preference, to the extent of such
preference.

The holders of shares of the Common Stock are entitled to such dividends as the
Board of Directors, in its discretion, may declare out of funds legally
available therefor.  Under the Texas Business Corporation Act, as amended (the
"TBCA"), dividends may not be paid if, after the payment, the Company's total
assets would be less than the sum of its total debts and stated capital, or if
the Company would be unable to pay its debts as they become due in the usual
course of its business.  There can be no assurances such dividends will continue
to be paid in the future.  Payment of future dividends will be dependent upon,
among other things, the Company's and the Bank's earnings and financial
condition, and the general economic and regulatory climate.

Funds for the payment of dividends by the Company are obtained primarily from
dividends received from the Bank.  Certain restrictions exist regarding the
ability of the Bank to pay dividends to the Company.  Under federal law, the
Bank cannot pay a dividend if it will cause the Bank to be "undercapitalized."
The regulators of the Bank and the Company may administratively impose stricter
limits on the ability of the Bank to pay dividends to the Company.

The Bank is also subject to risk based capital rules that restrict its ability
to pay dividends.  The risk based capital rules set an explicit schedule for
achieving minimum capital levels in relation to risk weighted assets.  The Bank
has been required to meet a minimum ratio of total capital to risk weighted
assets of 8.0%.  As of December 31, 2000, the Bank was in compliance with all
capital requirements.

American Stock Transfer & Trust Company presently serves as the transfer agent
and registrar for the Common Stock.

PREFERRED STOCK

The Board, without any further action by the shareholders but subject to limits
contained in the Articles of Incorporation, is authorized to issue up to
1,000,000 shares of Preferred Stock, in one or more series. The Board may fix by
resolution the terms of a series of Preferred Stock, such as: dividend rates and
preference of dividends, if any; conversion rights; voting rights; terms of
redemption and liquidation preferences; and, the number of shares constituting
each such series.

Holders of Preferred Stock have no right or power to vote on any matter except
as otherwise as required by law in which case they are entitled to one vote for
each share of Preferred Stock held. Upon the Company's dissolution, liquidation
or winding up, the holders of shares of Preferred Stock are entitled to receive
out of the Company's assets an amount per share equal to the respective
liquidation preference before any payment or distribution is made on the Common
Stock or any other class of capital stock that ranks junior to the particular
series of Preferred Stock. All outstanding series of Preferred Stock rank equal.
If the Company's assets available for distribution upon dissolution, liquidation
or winding up are insufficient to pay in full the liquidation preference payable
to the holders of shares of all series of Preferred Stock, distributions are to
be made proportionately on all outstanding shares of Preferred Stock.

                                       13
<PAGE>

ITEM 6 -- SELECTED FINANCIAL DATA

The following table sets forth summary historical data for the Company for the
periods indicated.  The stock-for-stock bank mergers that have been consummated
by the Company during the reported periods were all accounted for using the
"pooling of interests" method.  As such, all data prior to the respective
mergers have been restated to include the merged entities' balance sheet data
and historical results of operations. In addition, data has been restated to
reflect the effect of stock splits where applicable.

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                        --------------------------------------------------------------
                                                           2000         1999         1998        1997          1996
                                                        ----------   ---------    ----------   ----------   ----------
                                                                (In thousands, except for per share amounts)
<S>                                                     <C>          <C>          <C>           <C>          <C>
SUMMARY OF INCOME:
Interest income                                         $  156,430   $  123,621   $  110,677   $   94,962   $   75,256
Interest expense                                            58,109       35,132       32,446       29,825       24,055
                                                        ----------   ----------   ----------   ----------   ----------
Net interest income                                         98,321       88,489       78,231       65,137       51,201
Provision for credit losses                                  9,100        8,643        6,232        3,255        2,510
Noninterest income                                          39,567       29,268       21,788       12,979       11,657
Noninterest expense                                         89,927       78,026       66,572       52,187       41,393
                                                        ----------   ----------   ----------   ----------   ----------
Income before income taxes                                  38,861       31,088       27,215       22,674       18,955
Provision for income taxes                                  12,281        9,665        8,910        7,611        5,951
                                                        ----------   ----------   ----------   ----------   ----------
Net income                                              $   26,580   $   21,423   $   18,305   $   15,063   $   13,004
                                                        ==========   ==========   ==========   ==========   ==========
PER SHARE DATA:
Basic earnings per share                                $     1.02   $     0.83   $    0.73    $     0.61   $     0.53
Diluted earnings per share                              $     1.00   $     0.81   $    0.70    $     0.59   $     0.51
Book value per share at period-end                      $     6.05   $     5.12   $    4.50    $     3.73   $     3.21
Tangible book value per share at period-end             $     5.82   $     4.88   $    4.26    $     3.66   $     3.12
Shares used in computing basic earnings per share           26,144       25,806      25,234        24,662       25,454
Shares used in computing diluted earnings per share         26,555       26,337      26,267        25,695       25,307

BALANCE SHEET DATA (at period-end):
Total assets                                            $1,925,131   $1,959,480   $1,520,580   $1,400,478   $1,111,240
Loans, net of unearned discount                          1,368,129    1,194,981    1,037,373      869,502      673,130
Allowance for credit losses                                 15,693       13,187       10,829        8,278        7,850
Total securities                                           291,181      525,239      250,328      310,938      239,769
Deposits                                                 1,577,735    1,415,551    1,345,311    1,219,825    1,011,072
Other borrowed funds                                       140,364      362,332       15,333       45,169        5,157
Notes payable, senior debentures and ESOP indebtedness          --           --        2,069        2,621        6,798
Company-obligated mandatorily redeemable trust
  preferred securities of subsidiary trust                  28,750       28,750       28,750       28,750           --
Shareholders' equity                                       159,134      134,543      116,933       93,813        78,682

SELECTED PERFORMANCE RATIOS:
Return on average assets                                      1.36%        1.31%        1.27%        1.23%         1.32%
Return on average shareholders' equity                       18.08%       16.89%       17.22%       17.30%        17.67%
Dividend payout ratio                                        19.73%       21.06%       22.43%       20.53%        23.26%
Net interest margin (tax equivalent)                          5.63%        6.09%        6.05%        5.98%         5.89%

ASSET QUALITY RATIOS:
Nonperforming loans to total period-end loans                 0.73%        0.51%        0.57%        0.60%         0.51%
Period-end nonperforming assets to total assets               0.62%        0.39%        0.54%        0.49%         0.62%
Period-end allowance for credit losses to nonperforming
  loans                                                     157.20%      217.25%      181.57%      158.46%       228.46%
Period-end allowance for credit losses to total loans         1.15%        1.10%        1.04%        0.95%         1.17%
Net charge-offs to average loans                              0.53%        0.58%        0.39%        0.37%         0.31%

LIQUIDITY AND CAPITAL RATIOS:
Average loans to average deposits                            83.65%       78.37%       74.86%       69.01%        67.45%
Period-end shareholders' equity to average assets             8.27%        6.87%        7.69%        6.70%         7.08%
Average shareholders' equity to average assets                7.50%        7.75%        7.38%        7.09%         7.47%
Period-end Tier 1 capital to risk weighted assets            10.78%       10.92%       11.62%       12.35%        11.51%
Period-end total capital to risk weighted assets             11.51%       11.83%       12.51%       13.39%        12.67%
Period-end Tier 1 leverage ratio (Tier 1 capital to
  total average assets)                                       9.39%        8.28%        9.52%       10.72%         7.51%
</TABLE>

                                       14
<PAGE>

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

"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the Company analyzes the major elements of the Company's
consolidated balance sheets and statements of income.  This section should be
read in conjunction with the Company's consolidated financial statements and
accompanying notes and other detailed information incorporated by reference.
The stock-for-stock bank mergers that have been consummated by the Company
during the reported periods were all accounted for using the "pooling of
interests" method.  As such, all data prior to the respective mergers have been
restated to include the merged entities' balance sheet data and historical
results of operations.


RESULTS OF OPERATIONS

PERFORMANCE SUMMARY

Net income for 2000 was $26.6 million, an increase of $5.2 million, or 24.1%
over the $21.4 million recorded for 1999.  Net income of $21.4 million in 1999
increased $3.1 million, or 17.0% over the $18.3 million recorded for 1998.

Diluted earnings per share for 2000 was $1.00 as compared to $0.81 for 1999 and
$0.70 for 1998.  All per share amounts have been restated to reflect the stock
splits effected as stock dividends through February 20, 1998.

Two industry measures of the performance by a banking institution are its return
on average assets and return on average equity.  Return on average assets
("ROA") measures net earnings in relation to average total assets and indicates
a company's ability to employ its resources profitably.  During 2000, the
Company's ROA was 1.36%, as compared to 1.31% and 1.27% for 1999 and 1998,
respectively.  During 2000, the Company's return on equity was 18.08% compared
to 16.89% and 17.22% for 1999 and 1998, respectively.

                                       15
<PAGE>

Net Interest Income and Net Interest Margin

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

Net interest income for 2000 was $98.3 million, up $9.8 million or 11.1% from
$88.5 million for 1999 primarily due to a 20% increase in average earning
assets.   During 2000, the yield on interest earning assets increased 45 basis
points from 8.38% in 1999 to 8.83% in 2000.  Throughout the second half of 1999
and the first half of 2000, the Board of Governors of the Federal Reserve System
("Federal Reserve") increased the discount rate six times.  The cost of interest
bearing liabilities increased 107 basis points from 3.52% in 1999 to 4.59% in
2000.  This increase was due to the Federal Reserve rate increases as well as
new FHLB advances resulting from the leveraging program initiated in 1999. For
2000, the tax equivalent net interest margin (net interest income divided by
average total interest earning assets) decreased 46 basis points to 5.63% from
6.09% for 1999.

Net interest income for 1999 was $88.5 million, compared to $78.2 million for
1998, an increase of $10.3 million or 13.1%.  The improvement in net interest
income for 1999 was mainly due to an increase in total interest earning assets,
specifically in the loan portfolio.  During 1999, the yield on interest earning
assets decreased slightly from 8.48% in 1998 to 8.38% in 1999.  The total yield
on interest bearing liabilities decreased by 18 basis points from 3.70% in 1998
to 3.52% in 1999.  These declines were consistent with the overall trend in
interest rates during 1999.  For 1999, the tax equivalent net interest margin
increased 4 basis points to 6.09% from 6.05% for 1998.

Also of note, during the third quarter of 1999, the Bank initiated a temporary
leveraging strategy in order to enhance earnings by better utilizing current
levels of capital. Prior to the commencement of this leverage program, the
Bank's balance sheet was asset sensitive.  The leverage program, taken alone,
creates an interest rate mismatch.  However, taken together with the core assets
and liabilities of the Bank, the leverage program serves to mitigate the
interest rate risk of the Bank.  This leveraging was achieved by borrowing funds
(primarily short-term FHLB advances) and investing these funds in fixed and
variable rate mortgage-backed securities and variable rate collateralized
mortgage obligations. The spread on these assets over the cost of borrowed funds
averaged 163 basis points.  Excluding the leverage program, the tax equivalent
net interest margin would have been 6.31% for 1999.  This program accounted for
$554 thousand in net income after tax or $0.02 per diluted share for 1999.

                                       16
<PAGE>

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

<TABLE>
<CAPTION>

                                                                               YEAR ENDED DECEMBER 31,
                                           ----------------------------------------------------------------------------------------
                                                         2000                           1999                         1998
                                           -------------------------------  ---------------------------  --------------------------
                                            AVERAGE               AVERAGE   AVERAGE             AVERAGE  AVERAGE            AVERAGE
                                            BALANCE    INTEREST    YIELD    BALANCE   INTEREST   YIELD   BALANCE   INTEREST  YIELD
                                           ---------   --------   -------  --------  ---------  -------  -------   -------- -------
                                                                                   (In thousands)
<S>                                        <C>         <C>        <C>     <C>         <C>              <C>         <C>      <C>
INTEREST EARNING ASSETS:
Deposits in financial institutions         $      579  $     38    6.56%  $    1,678  $     79  4.71%  $    9,026  $    485   5.37%
Federal funds sold and securities
   purchased under agreements to resell        53,024     3,988    7.52%      64,901     3,737  5.76%      72,784     4,347   5.97%
Securities (taxable)                          405,946    27,559    6.79%     263,781    16,632  6.31%     235,576    14,642   6.22%
Securities (non-taxable)                       74,851     3,266    4.36%      70,691     3,098  4.38%      36,208     1,708   4.72%
Loans, net of unearned discount
   (taxable) (1)                            1,235,675   121,521    9.83%   1,074,412   100,032  9.31%     951,037    89,438   9.40%
Loans, net of unearned discount
   (non-taxable)                                  925        58    6.27%         584        43  7.36%         741        57   7.69%
                                           ----------  --------    ----   ----------  --------  ----   ---------   --------   ----
  Total interest earning assets             1,771,000   156,430    8.83%   1,476,047   123,621  8.38%   1,305,372   110,677   8.48%

NONINTEREST EARNING ASSETS:
Cash and due from banks                        64,147                         70,205                       77,897
Premises and equipment, net                    43,582                         40,081                       38,148
Other assets                                   95,507                         63,280                       28,776
Allowance for credit losses                   (14,491)                       (12,554)                      (9,474)
                                           ----------                     ----------                   ----------
  Total noninterest earning assets            188,745                        161,012                      135,347
                                           ----------                     ----------                   ----------
  Total assets                             $1,959,745                     $1,637,059                   $1,440,719
                                           ==========                     ==========                   ==========

INTEREST BEARING LIABILITIES:
Demand and savings deposits                $  594,916  $ 18,903    3.18%  $  550,525  $ 13,255  2.41%  $  537,978  $ 15,149   2.82%
Certificates and other time deposits          377,373    20,557    5.45%     351,529    16,501  4.69%     316,959    16,234   5.12%
Other borrowed funds                          293,506    18,649    6.35%      95,997     5,308  5.53%      19,603       888   4.53%
Notes payable, senior debentures and
   ESOP indebtedness                                -         -       -          955        68  7.12%       2,172       175   8.06%
                                           ----------  --------    ----   ----------  --------  ----   ---------   --------   ----
  Total interest bearing liabilities        1,265,795    58,109    4.59%     999,006    35,132  3.52%     876,712    32,446   3.70%

NONINTEREST BEARING LIABILITIES:
Demand deposits                               506,042                        469,660                      416,526
Other liabilities                              12,133                         12,775                       12,418
                                           ----------                     ----------                   ----------
  Total noninterest bearing liabilities       518,175                        482,435                      428,944

Trust preferred securities                     28,750                         28,750                       28,750
Shareholders' equity                          147,025                        126,868                      106,313
                                           ----------                     ----------                   ----------
  Total liabilities and shareholders'
     equity                                $1,959,745                     $1,637,059                   $1,440,719
                                           ==========                     ==========                   ==========
Net interest income and margin (2)                     $ 98,321    5.55%              $ 88,489  5.99%              $ 78,231   5.99%
                                                       ========    ====               ========  ====               ========   ====
Net interest income and margin
  (tax-equivalent basis) (3)                           $ 99,667    5.63%              $ 89,877  6.09%              $ 79,018   6.05%
                                                       ========    ====               ========  ====               ========   ====
</TABLE>
-----------
(1) Loan origination fees are considered adjustments to interest income.  These
    fees aggregated $1,919,000, $1,878,000 and $1,662,000 for the years ended
    December 31, 2000, 1999 and 1998, respectively.  Related loan origination
    costs are not separately allocated to loans, but are charged to non-interest
    expense.  For the purpose of calculating loan yields, average loan balances
    include nonaccrual loans with no related interest income.
(2) The net interest margin is equal to net interest income divided by average
    total interest earning assets.
(3) In order to make pretax income and resultant yields on tax-exempt
    investments and loans comparable to those on taxable investments and loans,
    a tax-equivalent adjustment is made equally to interest income and income
    tax expense with no effect on after tax income.  The tax equivalent
    adjustment has been computed using a federal income tax rate of 35%.

                                       17
<PAGE>

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

<TABLE>
<CAPTION>
                                                            2000 VS. 1999                       1999 VS. 1998
                                                         INCREASE (DECREASE)                 INCREASE (DECREASE)
                                                          DUE TO CHANGES IN:                  DUE TO CHANGES IN:
                                               ---------------------------------------------------------------------------------
                                                 VOLUME       RATE      TOTAL             VOLUME     RATE        TOTAL
                                              --------------------------------------------------------------------------------
<S>                                             <C>         <C>        <C>               <C>       <C>         <C>
INTEREST EARNING ASSETS:
Deposits in financial institutions              $   (72)    $   31     $   (41)          $  (346)  $   (60)     $  (406)
Federal funds sold and securities
   purchased under agreements to resell            (893)     1,144         251              (454)     (156)        (610)
Securities (taxable)                              9,651      1,276      10,927             1,778       212        1,990
Securities (non-taxable)                            182        (14)        168             1,511      (121)       1,390
Loans, net of unearned discount
   (taxable)                                     15,859      5,630      21,489            11,487      (893)      10,594
Loans, net of unearned discount
   (non-taxable)                                     21         (6)         15               (12)       (2)         (14)
                                               --------     ------     -------           -------   -------      -------
Total interest income                            24,748      8,061      32,809            13,964    (1,020)      12,944
                                               --------     ------     -------           -------   -------      -------

INTEREST BEARING LIABILITIES:
Demand and savings deposits                       1,410      4,238       5,648               302    (2,196)      (1,894)
Certificates and other time deposits              1,408      2,648       4,056             1,623    (1,356)         267
Other borrowed funds                             12,549        792      13,341             4,224       196        4,420
Notes payable, senior debentures and ESOP
   indebtedness                                     (68)         -         (68)              (87)      (20)        (107)
                                               --------     ------     -------           -------   -------      -------
Total interest expense                           15,299      7,678      22,977             6,062    (3,376)       2,686
                                               --------     ------     -------           -------   -------      -------
Net interest income                             $ 9,449     $  383     $ 9,832           $ 7,902   $ 2,356      $10,258
                                               ========     ======     =======           =======   =======      =======
</TABLE>

NONINTEREST INCOME

Total noninterest income for 2000 totaled $39.6 million, an increase of $10.3
million or 35.2% over $29.3 million in 1999.  For 1999, noninterest income
totaled $29.3 million, an increase of $7.5 million or 34.3% over $21.8 million
in 1998.  On July 2, 1998, the Bank purchased an additional 40 percent interest
in SCMC, resulting in total ownership of 80 percent.  The Bank's portion of
SCMC's earnings prior to July 2, 1998 is shown as "equity in earnings from
Sterling Capital Mortgage Company" and included in noninterest income.  Earnings
from July 2, 1998 forward are consolidated into the earnings of the Company in
their natural classifications.

The following table shows the breakout of noninterest income between commercial
banking and mortgage banking for 2000, 1999 and 1998 (in thousands):

<TABLE>
<CAPTION>
                                                2000                              1999                           1998
                                  --------------------------------   ----------------------------   -----------------------------
                                   COMMERCIAL  MORTGAGE              COMMERCIAL MORTGAGE            COMMERCIAL MORTGAGE
                                    BANKING    BANKING    COMBINED    BANKING   BANKING  COMBINED    BANKING   BANKING   COMBINED
                                  -----------  --------   --------   ---------- -------- --------   ---------- --------  --------
<S>                                 <C>        <C>        <C>         <C>       <C>      <C>        <C>        <C>      <C>
Customer service fees               $10,134    $     -    $10,134     $ 9,683  $     -   $ 9,683     $ 8,999   $    -   $ 8,999
Bank-owned life insurance
   income                             1,888          -      1,888         606                606           -        -         -
Equity in earnings of Sterling
   Capital Mortgage Company               -          -          -           -        -         -           -      495       495
Gain on the sale of
   University of Houston office           -          -          -         450        -       450           -        -         -
Gain on the sale of
   credit card loan portfolio           237          -        237           -        -         -           -        -         -
Gain on the sale of land                244          -        244           -        -         -           -        -         -
Condemnation award                        -          -          -           -        -         -         478        -       478
Gains on sale of mortgage loans           -     11,959     11,959           -   10,898    10,898           -    5,927     5,927
Brokerage commissions                   622          -        622         437        -       437         176        -       176
Other                                 4,646      9,837     14,483       4,507    2,687     7,194       4,464    1,249     5,713
                                    -------    -------    -------     -------  -------   -------     -------   ------   -------
                                    $17,771    $21,796    $39,567     $15,683  $13,585   $29,268     $14,117   $7,671   $21,788
                                    =======    =======    =======     =======  =======   =======     =======   ======   =======
</TABLE>

                                       18
<PAGE>

COMMERCIAL BANKING SEGMENT. For 2000, noninterest income from commercial banking
was $17.8 million, as compared to $15.7 million for 1999, and increase of $2.1
million or 13.3%.  During the latter half of 1999, the Bank purchased bank-owned
life insurance ("BOLI") policies.  Interest credits for these BOLI policies
totaled $1.9 million for 2000 as compared to $606 for 1999, an increase of $1.3
million.   Customer service fees increased $451 thousand or 4.7% primarily as a
result of an overall increase in average demand and savings accounts of 7.9%.
In December 2000, the Bank sold land for a gain of $244 thousand.  Finally,
during the first quarter of 2000, the Bank sold its credit card portfolio to a
correspondent bank for a net gain of $237 thousand. For 1999, noninterest income
from commercial banking totaled $15.7 million, an increase of $1.6 million or
11.1% compared to $14.1 million in 1998.  The increase is primarily attributed
to volume growth in deposit accounts.  Also, during 1999, the Bank sold its
University of Houston office which had approximately $10 million in student
loans.  A gain of $450 thousand was recognized on the sale.  During 1998, the
Bank received a condemnation award of $478 thousand for damages to real property
seized by the Texas Department of Transportation.

MORTGAGE BANKING SEGMENT.  For 2000, noninterest income from the mortgage
banking segment increased $8.2 million or 60.4% from $13.6 million for 1999.
Income from the mortgage banking segment primarily consists of fees and gains on
sale of mortgage loans.  The average length of time a mortgage loan is held in
the portfolio of SCMC is approximately twenty-five to thirty days.  The increase
in noninterest income and noninterest expense is primarily due to an increase in
loan funding volume as well as SCMC's acquisition of Alliance Capital Mortgage
located in Portland, Oregon in April 2000 and Select Mortgage Company located in
Seattle, Washington in November 1999.

NONINTEREST EXPENSE

For 2000, noninterest expenses totaled $89.9 million, an increase of $11.9
million or 15.3% over $78.0 million in 1999.  Noninterest expenses are shown as
follows (in thousands):

<TABLE>
<CAPTION>
                                                2000                              1999                           1998
                                  --------------------------------   ----------------------------   -----------------------------
                                   COMMERCIAL  MORTGAGE              COMMERCIAL MORTGAGE            COMMERCIAL MORTGAGE
                                    BANKING    BANKING    COMBINED    BANKING   BANKING  COMBINED    BANKING   BANKING   COMBINED
                                  -----------  --------   --------   ---------- -------- --------   ---------- --------  --------
<S>                                <C>         <C>        <C>         <C>       <C>      <C>        <C>        <C>      <C>
Salaries and employee benefits      $41,447     $ 8,803    $50,250     $36,113   $ 6,781  $42,894     $31,392   $2,653    $34,045
Occupancy expenses                    9,575       3,533     13,108       8,512     2,190   10,702       7,596    1,004      8,600
Net losses and carrying costs
  of real estate acquired by
  foreclosure                           293           -        293          30         -       30         336        -        336
FDIC assessment                         274           -        274         366         -      366         351        -        351
Technology                            3,644         122      3,766       3,871        97    3,968       4,244        -      4,244
Postage and delivery charges          1,391         325      1,716       1,443       167    1,610       1,291      107      1,398
Supplies                              1,105         428      1,533       1,247       359    1,606       1,315      224      1,539
Professional fees                     1,864         246      2,110       1,730       131    1,861       1,900       61      1,961
Minority interest expense             2,668         752      3,420       2,668       352    3,020       2,668      304      2,972
Other                                10,957       2,500     13,457      10,838     1,131   11,969      10,175      951     11,126
                                    -------     -------    -------     -------   -------  -------     -------   ------    -------
                                    $73,218     $16,709    $89,927     $66,818   $11,208  $78,026     $61,268   $5,304    $66,572
                                    =======     =======    =======     =======   =======  =======     =======   ======    =======
</TABLE>

COMMERCIAL BANKING SEGMENT.  For 2000, noninterest expenses related to
commercial banking were $73.2 million, as compared to $66.8 million for 1999, an
increase of $6.4 million or 9.6%.  During the second quarter of 1999, the Bank
recorded noninterest expenses of $1 million related to the acquisition of B.O.A.
Bancshares.  Excluding the special charges related to the acquisition,
noninterest expenses increased $7.4 million or 11.2%.

Salaries and employee benefits in the commercial banking segment for 2000
totaled $41.4 million, an increase of $5.3 million or 14.8% over $36.1 million
for 1999 due primarily to an increase in the number of full time equivalent
employees and routine salary increases. The Bank increased its number of full-
time equivalent personnel by 35 or 4.9% during the year, from 708 at year-end
1999 to 743 at year-end 2000.  The largest part of this increase is attributable
to the hiring of new employees to expand the Bank's lending force and its credit
analyst pool, personnel for the two de novo offices (Bellaire and Dallas), and
two new senior credit officers.  Salaries and employee benefits in the
commercial banking segment for 1999 totaled $36.1 million, an increase of $4.7
million or 15.0% over $31.4 million for 1998 due primarily to an increase in the
number of full time equivalent employees and routine salary increases.  The Bank
increased its number of full-time equivalent

                                       19
<PAGE>

personnel by 38 or 5.7% during 1999, from 670 at year-end 1998 to 708 at year-
end 1999. Average full-time equivalent personnel increased 8.61% in 1999
compared to 1998. The increases in full-time equivalents are due to staffing
requirements to propel and sustain growth in loans and deposits as well as
increases in central support functions.

Occupancy expense in the commercial banking segment totaled $9.6 million in 2000
as compared to $8.5 million in 1999, an increase of $1.1 million, or 12.5%.
This increase primarily resulted from the opening of the two de novo offices
during 2000.  Occupancy expense in the commercial banking segment totaled $8.5
million in 1999, an increase of $916 thousand or 12.1% over $7.6 million in
1998.  This increase was due to the new lease space for the Memorial and Fort
Bend offices.  Also, there were asset write-downs and lease-buy-outs for
equipment which were related to the Houston Commerce Bank acquisition and
conversion.

Technology expense in 2000 totaled $3.6 million, a decrease of $227 thousand or
5.9% from $3.9 million in 1999.  Technology expense in 1999 totaled $3.9
million, a decrease of $373 thousand or 8.8% from $4.2 million in 1998.  In
1998, technology expense included non-recurring expenses associated with the
acquisition of Humble and Hometown as well as Year 2000 readiness initiatives
and 1999 included non-recurring expenses associated with the acquisition of
Houston Commerce Bank.

Other expenses in the commercial banking segment totaled $11.0 million in 2000,
an increase of $119 thousand or 1.1%, from $10.8 million in 1999.  Other
expenses in the commercial banking segment totaled $10.8 million in 1999, an
increase of $663 thousand or 6.5%, from $10.2 million in 1998.  This increase is
due to an expanding infrastructure to support growth.

MORTGAGE BANKING SEGMENT. Noninterest expense for the mortgage banking segment
for 2000 was $16.7 million, as compared to $11.2 million for 1999, an increase
$5.5 million or 49.1%.  This increase in noninterest expense is primarily due to
the increase in loan funding volume as well as SCMC's acquisition of Alliance
Capital Mortgage and Select Mortgage Company.  Noninterest expense for the
mortgage banking segment for 1999 increased 111% over 1998.  This increase
resulted from the fact that, prior to July 2, 1998, the Bank owned only 40
percent of SCMC and recorded income on the equity basis.  Subsequent to July 2,
1998, the Bank owned 80 percent of SCMC and earnings were consolidated with the
Bank.  Accordingly, the expenses for 1999 were approximately double those of
1998.

INCOME TAXES

The Company provided $12.3 million for federal income taxes for 2000, $9.7
million for 1999, and $8.9 million for 1998.  The effective tax rates for 2000,
1999, and 1998 were 31.6%, 31.1%, and 32.7%, respectively.

FINANCIAL CONDITION

LOANS HELD FOR INVESTMENT

At December 31, 2000, loans held for investment totaled $1.229 billion, an
increase of $104.4 million or 9.3% over loans at December 31, 1999 of $1.125
billion.

At December 31, 2000, total loans were 86.7% of deposits and 71.1% of total
assets. At December 31, 1999, total loans were 84.4% of deposits and 61.0% of
total assets.

                                       20
<PAGE>

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

<TABLE>
<CAPTION>
                                      2000                  1999              1998                 1997                 1996
                            ------------------    ------------------   ----------------     ----------------     ----------------
                              AMOUNT      %          AMOUNT      %       AMOUNT     %         AMOUNT      %        AMOUNT      %
                            ---------   -----     ----------   -----   ---------  -----     ---------  -----     ---------  -----
<S>                         <C>         <C>       <C>          <C>     <C>        <C>       <C>        <C>       <C>        <C>
Commercial, financial
 and industrial:
  US addressees             $  435,676   35.5%    $  411,324   36.6%    $338,634   35.6%     $299,016   37.3%     $223,817   35.4%
  Non-US addressees              4,807    0.4%         5,917    0.5%       4,047    0.4%          771    0.1%        1,353    0.2%
Real estate mortgage:
  Commercial                   402,765   32.8%       339,593   30.2%     263,991   27.7%      220,425   27.5%      169,072   26.7%
  Residential                  145,784   11.8%       137,848   12.2%     118,672   12.5%      101,511   12.7%       79,107   12.5%
Real estate construction       122,800   10.0%       110,850    9.9%     112,769   11.8%       73,071    9.1%       56,084    8.9%
Installment                    117,149    9.5%       119,045   10.6%     114,405   12.0%      106,580   13.3%      103,493   16.3%
                            ----------  ------    ----------  ------    --------  ------     --------  ------     --------  ------
                            $1,228,981  100.0%    $1,124,577  100.0%    $952,518  100.0%     $801,374  100.0%     $632,926  100.0%
                            ==========  ======    ==========  ======    ========  ======     ========  ======     ========  ======
</TABLE>

The primary lending focus of the Bank is on commercial loans and owner-occupied
real estate loans to local businesses with annual sales ranging from $300,000 to
$30 million.  Typically, the Bank's customers have financing requirements
between $50,000 and $500,000.  Although the Bank's legal lending limit was $20
million at December 31, 2000, the Bank has not maintained an exposure greater
than $9.6 million on any single relationship.

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

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

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

The Bank makes automobile, boat, home improvement and other loans to consumers.
These loans are primarily made to customers who have other relationships with
the Bank.  During the first quarter of 2000, the Bank sold its credit card
portfolio to a correspondent bank.  As of December 31, 1999, the Bank had an
outstanding credit card balance of $6.1 million.

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

As of December 31, 2000, there was no concentration of loans to any one type of
industry exceeding 10% of total loans nor were there any loans classified as
highly leveraged transactions.

LOANS HELD FOR SALE

Loans held for sale totaled $139.1 million at December 31, 2000, an increase
from $70.4 million at December 31, 1999.   The $68.7 million increase is due to
the increase in loans funded by the Bank through an

                                       21
<PAGE>

intercompany mortgage warehouse with SCMC. Mortgage loans originated by SCMC are
held for sale and are typically sold to investors within one month of
origination. Due to the timing of the sales of loans to investors, the balance
of these loans at any given time is somewhat volatile.

RISK ELEMENTS

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

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

The Bank had no material foreign loans outstanding or loan concentrations for
the years ended December 31, 1996 through 2000.  The Bank, however, continues to
monitor the potential risk of foreign borrowers and concentrations of credit.

The following table presents information regarding non-performing loans and
assets as of December 31, 1996 through 2000 (in thousands):


<TABLE>
<CAPTION>
                                                2000              1999              1998              1997              1996
                                            ----------        ----------        ----------        ----------        ----------
<S>                                         <C>               <C>               <C>               <C>               <C>
Nonaccrual loans                            $    8,081        $    5,501        $    4,828        $    4,502        $    2,996
Restructured loans                               1,298               218               312               217                45
Accruing loans past due 90 days or more            604               351               824               505               395
                                            ----------        ----------        ----------        ----------        ----------
Total nonperforming loans                        9,983             6,070             5,964             5,224             3,436
Real estate acquired by foreclosure              1,702             1,323             1,965             1,082             3,082
Other repossessed assets                           192               243               356               536               384
                                            ----------        ----------        ----------        ----------        ----------
Total nonperforming assets                  $   11,877        $    7,636        $    8,285        $    6,842        $    6,902
                                            ==========        ==========        ==========        ==========        ==========
Nonperforming loans to total loans                0.73%             0.51%             0.57%             0.60%             0.51%
Nonperforming assets to total assets              0.62%             0.39%             0.54%             0.49%             0.62%

Potential problem loans                     $   36,833        $   24,483        $   20,870        $   13,701        $   15,144
                                            ==========        ==========        ==========        ==========        ==========
Total loans                                 $1,368,129        $1,194,981        $1,037,373        $  871,568        $  673,895
                                            ==========        ==========        ==========        ==========        ==========
Total assets                                $1,925,131        $1,959,480        $1,520,580        $1,400,880        $1,111,337
                                            ==========        ==========        ==========        ==========        ==========
</TABLE>


ALLOWANCE FOR CREDIT LOSSES

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

                                       22
<PAGE>

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

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

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

At December 31, 2000, substandard loans totaled $44.6 million, of which $8.4
million were loans designated as delinquent or nonaccrual; and doubtful loans
totaled $2.2 million of which $2.0 million were designated as delinquent or
nonaccrual.

In addition to the internally classified loan list and delinquency list of
loans, the Bank maintains a separate "watch list" which further aids the Bank in
monitoring loan portfolios.  Watch list loans show warning elements where the
present status portrays one or more deficiencies that require attention in the
short run or where pertinent ratios of the loan account have weakened to a point
where more frequent monitoring is warranted.  These loans do not have all the
characteristics of a classified loan (substandard or doubtful) but do show
weakened elements as compared with those of a satisfactory credit.  The Bank
reviews these loans to assist in assessing the adequacy of the allowance for
credit losses.  As of December 31, 2000, watch list loans totaled $67.0 million.

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

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

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

                                       23
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                -------------------------------------------------------------------------------
                                                     2000             1999               1998            1997            1996
                                                -------------------------------------------------------------------------------
<S>                                              <C>               <C>               <C>               <C>             <C>
Average loans outstanding                        $1,236,600        $1,074,996        $  951,778        $757,344        $598,564
                                                 ==========        ==========        ==========        ========        ========
Loans outstanding at period end                  $1,368,129        $1,194,981        $1,037,373        $869,502        $673,130
                                                 ==========        ==========        ==========        ========        ========

Allowance for credit losses at January 1         $   13,187        $   10,829        $    8,278        $  7,850        $  7,225

Charge-offs:
  Commercial, financial, and industrial               6,785             5,063             2,686           1,834           1,499
  Real estate, mortgage and construction                643               162               510             119             153
  Installment                                            25             1,895             1,092           1,347             724
                                                 ----------        ----------        ----------        --------        --------
    Total charge-offs                                 7,453             7,120             4,288           3,300           2,376
Recoveries:
  Commercial, financial, and industrial                 819               615               223             257             305
  Real estate, mortgage and construction                 31                42               120              28              39
  Installment                                             9               178               264             188             147
                                                 ----------        ----------        ----------        --------        --------
    Total recoveries                                    859               835               607             473             491
                                                 ----------        ----------        ----------        --------        --------
Net charge-offs                                       6,594             6,285             3,681           2,827           1,885

Provision for credit losses                           9,100             8,643             6,232           3,255           2,510
                                                 ----------        ----------        ----------        --------        --------
Allowance for credit losses at December 31       $   15,693        $   13,187        $   10,829        $  8,278        $  7,850
                                                 ==========        ==========        ==========        ========        ========
Ratios:
  Allowance to average loans                           1.27%             1.23%             1.14%           1.09%           1.31%
  Allowance to period end loans                        1.15%             1.10%             1.04%           0.95%           1.17%
  Net charge-offs to average loans                     0.53%             0.58%             0.39%           0.37%           0.31%
  Allowance to period-end nonperforming loans        157.20%           217.25%           181.57%         158.46%         228.46%
</TABLE>

ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES

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

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                                             (IN THOUSANDS)
                            ------------------------------------------------------------------------------------------------------
                                     2000                 1999                  1998                1997                1996
                              ------------------   ------------------     -----------------   ------------------  ----------------
Balance of allowance                      % OF                  % OF                 % OF                 % OF                % OF
  for credit losses at end                ALLOW-               ALLOW-               ALLOW-               ALLOW-              ALLOW-
  of period applicable to:     AMOUNT      ANCE    AMOUNT       ANCE      AMOUNT    ANCE      AMOUNT      ANCE     AMOUNT     ANCE
                              -------    -------   ------      ------     ------    ------    ------     -------   ------    ------
<S>                           <C>         <C>      <C>         <C>        <C>      <C>        <C>       <C>        <C>      <C>
Commercial, financial
  and industrial              $ 7,159      46%     $ 5,163        39%     $ 3,356     31%     $1,727       21%     $2,118      27%
Real estate, mortgage
  and construction              2,670      17%       2,650        20%       1,477     14%        508        6%        485       6%
Installment                       956       6%         768         6%         679      6%        596        7%        480       6%
Unallocated                     4,908      31%       4,606        35%       5,317     49%      5,447       66%      4,767      61%
                              -------     ----     -------       ----     -------    ----     ------      ----     ------     ----
                              $15,693     100%     $13,187       100%     $10,829    100%     $8,278      100%     $7,850     100%
                              =======     ====     =======       ====     =======    ====     ======      ====     ======     ====
 </TABLE>

                                       24
<PAGE>

SECURITIES

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

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                                          (IN THOUSANDS)
                                         ---------------------------------------------------------------------------------
                                           2000             %             1999            %            1998           %
                                         --------         -----         --------        -----         -------        -----
<S>                                      <C>              <C>           <C>             <C>           <C>            <C>
U.S. Treasury securities and
   obligations of U.S. government
   agencies                              $ 27,279           9.4%        $107,636         20.5%        $114,954        45.9%
Obligations of states and political
   subdivisions                            73,724          25.3%          76,811         14.6%          53,435        21.3%
Mortgage-backed securities and
   collateralized mortgage obligations    177,617          61.0%         324,517         61.8%          62,790        25.1%
Other securities                           12,561           4.3%          16,275          3.1%          19,149         7.7%
                                         --------         ------        --------        ------        --------       ------
                                         $291,181         100.0%        $525,239        100.0%        $250,328       100.0%
                                         ========         ======        ========        ======        ========       ======
</TABLE>

At December 31, 2000, securities of $291.2 million had decreased $234.0 million
from $525.2 million at December 31, 1999.  During the third quarter of 1999, the
Bank initiated a temporary leveraging strategy in order to enhance earnings by
better utilizing current levels of capital.  With this strategy, the Bank had
invested $254 million in variable and fixed rate mortgage-backed securities and
variable rate collateralized mortgage obligations.  Through paydowns, maturities
and sales, the leverage strategy was unwound by the end of 2000.  At December
31, 2000 and 1999, securities represented 18.5% and 37.1% of total deposits and
15.1% and 26.8% of total assets, respectively.

The yield on the Bank's securities portfolio at December 31, 2000, was 6.5%.
The weighted-average life of the portfolio was approximately 6.2 years and the
duration was approximately 4.2 years.  The yield on the Bank's securities
portfolio at December 31, 1999, was 5.9%.  The weighted-average life of the
portfolio was approximately 10.0 years and the duration was approximately 2.8
years.

The maturity distribution and weighted average yield of the Bank's debt security
portfolio as of December 31, 2000, are summarized in the following table (in
thousands).

<TABLE>
<CAPTION>
                              DUE LESS THAN               DUE 1-5               DUE 5-10              DUE MORE THAN
                                 1 YEAR                    YEARS                 YEARS                   10 YEARS          TOTAL
                         -------------------     -------------------      ------------------       --------------------   --------
                           AMOUNT     YIELD       AMOUNT       YIELD       AMOUNT      YIELD        AMOUNT       YIELD
                         ---------   -------     -------      ------      --------     -----       --------     -------
<S>                       <C>        <C>         <C>          <C>         <C>          <C>         <C>          <C>       <C>
U.S. Treasury
  securities and
  obligations of
  U.S. government
  agencies                  $1,012    8.40%        $23,246      6.28%      $ 3,021     7.24%         $      -       -      $ 27,279
Obligations of
  states and political
  subdivisions               5,369    5.03%         44,680     4.62%        22,940     5.00%              735    5.57%       73,724
Mortgage-backed
  securities and
  collateralized
  mortgage obligations           -       -           5,812     6.19%         2,610     6.04%          169,195    7.08%      177,617
                            ------    -----        -------     -----       -------     -----         --------    -----     --------
                            $6,381    5.56%        $73,738     5.29%       $28,571     5.34%         $169,930    7.08%     $278,620
                            ======    =====        =======     =====       =======     =====         ========    =====     ========
</TABLE>

                                       25
<PAGE>

DEPOSITS

The Bank's lending and investing activities are funded almost entirely by core
deposits, approximately 74.5% of which are demand and savings deposits.
Noninterest bearing deposits at December 31, 2000 were $561.9 million as
compared to $481.8 million at December 31, 1999, an increase of $80.2 million or
16.6% over 1999. Approximately 35.6% of deposits at December 31, 2000 were
noninterest bearing as compared to 34.0% at December 31, 1999.  The Bank does
not accept brokered deposits.

The Bank's average total deposits for 2000 were $1.5 billion, or $106.6 million
and 7.8% over average total deposits during 1999 that were $1.4 billion.  The
Bank's total deposits at December 31, 2000 were $1.6 billion, up $162.2 million
or 11.5% over total deposits of $1.4 billion at year-end 1999.  Deposit growth
continues to be concentrated primarily in core deposits, consisting of all
deposits other than retail and public fund certificates of deposit in excess of
$100,000.

The average balances and weighted average rates paid on deposits for each of the
years ended December 31, 2000, 1999, and 1998 are presented below (in
thousands):

<TABLE>
<CAPTION>
                                                             2000                     1999                    1998
                                                     ---------------------   ---------------------   ---------------------
                                                      AVERAGE     AVERAGE      AVERAGE    AVERAGE      AVERAGE     AVERAGE
                                                      BALANCE      RATE        BALANCE     RATE        BALANCE      RATE
                                                     ---------   ---------   ----------   --------   ----------   --------
<S>                                                  <C>          <C>        <C>          <C>        <C>           <C>
Noninterest bearing demand deposits                  $  506,042               $  469,660              $  416,526
Interest bearing demand and savings deposits            594,916      3.18%       550,525     2.41%       537,978      2.82%
Time deposits                                           377,373      5.45%       351,529     4.69%       316,959      5.12%
                                                     ----------      -----    ----------     -----    ----------      -----
                                                     $1,478,331      2.67%    $1,371,714     2.17%    $1,271,463      2.47%
                                                     ==========      =====    ==========     =====    ==========      =====
</TABLE>

The Bank's time deposits of $100,000 or more have consistently shown a pattern
of renewal similar to that for deposits of less than $100,000.  See Note I of
the consolidated financial statements for maturities of certificates of deposits
of $100,000 or more.

OTHER BORROWED FUNDS

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

During the third quarter of 1999, the Company initiated a leveraging strategy
whereby the Bank borrowed funds on a short-term basis from the Federal Home Loan
Bank ("FHLB") and invested $254 million in mortgage backed securities and
collateralized mortgage obligations.  Through paydowns, maturities, and sales of
securities, the borrowings at FHLB decreased.  As a result, FHLB borrowings
totaled $128.0 million at December 31, 2000 and had a rate of  6.74% and a
maturity of four days.

COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES

In June 1997, the Company formed Sterling Bancshares Capital Trust I, a trust
formed under the laws of the State of Delaware ("Trust I").  Trust I issued
$28,750,000 of 9.28% Trust Preferred Securities and invested the proceeds
thereof in the 9.28% Junior Subordinated Deferrable Interest Debentures (the
"9.28% Junior Subordinated Debentures") issued by the Company.  The 9.28% Junior
Subordinated Debentures will mature on June 6, 2027, which date may be shortened
to a date not earlier than June 6, 2002 if certain conditions are met (including
the Company having received prior approval of the Federal Reserve and any other
required regulatory approvals). The 9.28% Trust Preferred Securities will be
subject to mandatory redemption in a like amount contemporaneously with the
optional prepayment of the 9.28% Junior Subordinated Debentures by the Company.
The 9.28% Junior Subordinated Debentures may be prepaid upon the occurrence and
continuation of certain events including a change in the tax status or
regulatory capital treatment of the 9.28% Trust Preferred Securities. In each
case, redemption will be made at a price equal to 100% of the face amount of the
9.28% Trust Preferred Securities, plus the accrued and unpaid distributions
thereon through the redemption date.

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

                                       26
<PAGE>

INTEREST RATE SENSITIVITY AND LIQUIDITY

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

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

Based on simulation analysis of the interest rate sensitivity inherent in the
Company's net interest income and market value of portfolio equity, as of
December 31, 2000 and as adjusted by instantaneous rate changes upward and
downward of up to 100 basis points, the Company is slightly asset sensitive.
The Company's analysis indicates that an instantaneous 100 basis point move
downward in interest rates would decrease net interest income by 1.86% and
increase the present value of equity by 0.26%; likewise, an instantaneous 100
basis point move upward in interest rates would increase net interest income by
1.87% and decrease the present value of equity by 1.78%.  These sensitivities
are all within the threshold set by the Company's Asset/Liability Committee.
Each rate scenario reflects unique prepayment and repricing assumptions.  Since
there are limitations inherent in any methodology used to estimate the exposure
to changes in market interest rates, this analysis is not intended to be a
forecast of the actual effect of a change in market interest rates on the
Company.  The Company's interest rate sensitivity analysis includes assumptions
that (i) the composition of the Company's interest sensitive assets and
liabilities existing at fiscal year end will remain constant over the
measurement period; and (ii) that changes in market rates are parallel and
instantaneous across the yield curve regardless of duration or repricing
characteristics of specific assets or liabilities.  Further, the analysis does
not contemplate any actions that the Company might undertake in response to
changes in market interest rates.  Accordingly, this analysis is not intended to
and does not provide a precise forecast of the effect actual changes in market
rates will have on the Company.

An interest rate sensitive asset or liability is one that, within a defined time
period, either matures or experiences an interest rate change in line with
general market interest rates.  The management of interest rate risk is
performed by analyzing the maturity and repricing relationships between interest
earning assets and interest bearing liabilities at specific points in time
("GAP") and by analyzing the effects of interest rate changes on net interest
income over specific periods of time by projecting the performance of the mix of
assets and liabilities in varied interest rate environments.  Interest rate
sensitivity reflects the potential effect on net interest income of a movement
in interest rates.  A company is considered to be asset sensitive, or having a
positive GAP, when the amount of its interest earning assets maturing or
repricing within a given period exceeds the amount of its interest bearing
liabilities also maturing or repricing within that time period.  Conversely, a
company is considered to be liability sensitive, or having a negative GAP, when
the amount of its interest bearing liabilities maturing or repricing within a
given period exceeds the amount of its interest earning assets also maturing or
repricing within that time period.  During a period of rising interest rates, a
negative GAP would tend to affect adversely net interest income, while a
positive GAP would tend to result in an increase in net interest income.  During
a period of falling interest rates, a negative GAP would tend to result in an
increase in net interest income, while a positive GAP would tend to affect net
interest income adversely.  When analyzing its GAP position, the Company
emphasizes the next twelve-month period.

                                       27
<PAGE>

The following table sets forth the expected maturity and repricing
characteristics of the Company's interest earning assets and interest bearing
liabilities as of December 31, 2000:

<TABLE>
<CAPTION>
                                          0-90             90-365           1-3             3-5          OVER
                                          DAYS              DAYS           YEARS           YEARS        5 YEARS        TOTAL
                                      -----------      -----------       ---------       --------       -------      ----------
                                                       (In thousands, except for data expressed in percentages)
<S>                                   <C>              <C>               <C>             <C>            <C>          <C>
INTEREST EARNING ASSETS:

Cash and cash equivalents             $    33,145      $         -       $      -        $      -       $      -     $   33,145
Securities purchased under
  agreements to resell                     37,863                -              -               -              -         37,863
Deposits in other financial
  institutions                                142              100              -               -              -            242
Securities                                 35,096           46,053         79,718          43,204         87,110        291,181
Loans                                     703,892           97,150        215,402         303,924         47,761      1,368,129
                                      -----------      -----------      ---------        --------       --------     ----------
   Total interest earning assets          810,138          143,303        295,120         347,128        134,871      1,730,560

INTEREST BEARING LIABILITIES:
Demand and savings deposits               613,179                -              -               -              -        613,179
Certificates of deposit and
  other time deposits                     190,537          171,658         28,897          11,503             23        402,618
Other borrowed funds                      140,364                -              -               -              -        140,364
                                      -----------      -----------      ---------        --------       --------     ----------
   Total interest bearing
     liabilities                          944,080          171,658         28,897          11,503             23      1,156,161
                                      -----------      -----------      ---------        --------       --------     ----------
Period GAP                            $  (133,942)     $   (28,355)      $266,223        $335,625       $134,848     $  574,399
                                      ===========      ===========      =========        ========       ========     ==========
Cumulative GAP                        $  (133,942)     $  (162,297)      $103,926        $439,551       $574,399
                                      ===========      ===========      =========        ========       ========
Period GAP to total assets                  (6.96)%          (1.47)%        13.83%          17.43%          7.00%
                                      ===========      ===========      =========        ========       ========
Cumulative GAP to total assets              (6.96)%           8.43%          5.40%          22.83%         29.84%
                                      ===========      ===========      =========        ========       ========
</TABLE>

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

Liquidity involves the Company's ability to raise funds to support asset growth
or reduce assets to meet deposit withdrawals and other payment obligations, to
maintain reserve requirements and otherwise to operate the Company on an ongoing
basis.  In recent years, the Company's liquidity needs have primarily been met
by growth in core deposits.  Additionally, the Bank has access to purchased
funds from correspondent banks and borrowings from the Federal Home Loan Bank,
supplemented by amortizing investment and loan portfolios, which has created an
adequate liquidity position. Also, the Company maintains a $20 million revolving
line of credit with Wells Fargo Bank Minnesota, National Association. The
initial line of credit was renewed on February 2, 2001 for an additional one
year period ending on February 2, 2002. If the Company draws on the line of
credit, it will pay interest equal to 1.95% in excess of the Federal Funds Rate
in effect from time to time. In addition, the Company pays a quarterly fee equal
to one-eighth of one percent (0.125%) of the average daily unused portion of the
line of credit.


CAPITAL RESOURCES

At December 31, 2000, shareholders' equity totaled $159.1 million or 8.3% of
total assets, as compared to $134.5 million and 6.9% of total assets at December
31, 1999.

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

Banking regulators have also issued leverage ratio requirements.  The leverage
ratio requirement is measured as the ratio of Tier 1 capital to adjusted assets.
See Note S to the Company's consolidated financial statements for further
discussion of the Company's and the Bank's regulatory capital requirements.

                                       28
<PAGE>

The Bank's capital levels at December 31, 2000 and 1999 qualify it as "well-
capitalized," the highest of five tiers under applicable regulatory definitions.


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

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

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

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

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

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

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

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

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

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

OUR PROFITABILITY DEPENDS SIGNIFICANTLY ON LOCAL ECONOMIC CONDITIONS.

Our success depends primarily on the general economic conditions of the Houston
metropolitan area.  Unlike larger banks that are more geographically
diversified, we provide banking and financial services to customers primarily in
the Houston metropolitan area.  Houston's local economic conditions 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, unemployment and other factors beyond our control
will impact these local economic conditions and will negatively affect the
financial results of our banking operations.  In addition, since Houston remains
largely dependent on the energy industry, a downturn in the energy industry and
energy-related businesses could adversely affect our results of operations and
financial condition.

WE RELY ON AN OWNER-OPERATED BUSINESS MARKET.

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

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

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

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

FLUCTUATIONS IN INTEREST RATES COULD REDUCE OUR PROFITABILITY.

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

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

  .  inflation;

  .  recession;

  .  a rise in unemployment;

  .  tightening money supply; and

  .  international disorder and instability in domestic and foreign financial
     markets.

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

COMPETITION WITH OTHER FINANCIAL INSTITUTIONS COULD ADVERSELY AFFECT OUR
PROFITABILITY.

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

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

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

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

Our growth strategy is dependent on our ability to acquire other financial
institutions.  On March 1, 2001, we entered into a definitive agreement to
acquire Lone Star Bancorporation, Inc., headquartered in Houston, Texas, and its
subsidiary bank, Lone Star Bank.  We will complete the acquisition of Lone Star
Bancorporation only if all closing conditions are met, including qualification
of the transaction for pooling of interests accounting treatment, receipt of
regulatory approvals and approval of Lone Star Bancorporation's shareholders.

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

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

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

ITEM 7A - QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

For information regarding the market risk of the Company's financial
instruments, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - INTEREST RATE SENSITIVITY AND LIQUIDITY."  The
Company's principal market risk exposure is to interest rates.

ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the index included on page 34 and the Consolidated Financial Statements
which begin on page 36 of this Form 10-K.

ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART - III

ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information set forth under the caption "ELECTION OF DIRECTORS" of the
Company's Proxy Statement dated March 23, 2001, relating to the 2001 Annual
Meeting of Shareholders of the Company, is incorporated herein by reference.

ITEM 11 -- EXECUTIVE COMPENSATION

The information set forth under the caption "EXECUTIVE COMPENSATION" of the
Company's Proxy Statement dated March 23, 2001, relating to the 2001 Annual
Meeting of Shareholders of the Company, is incorporated herein by reference.

ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information relating to the beneficial ownership of the outstanding shares
of Common Stock of the Company by its directors and executive officers set forth
under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" of the Company's Proxy Statement dated March 23, 2001, relating to
the 2001 Annual Meeting of Shareholders of the Corporation, is incorporated
herein by reference.

ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption "CERTAIN TRANSACTIONS" of the
Company's Proxy Statement dated March 23, 2001, relating to the 2001 Annual
Meeting of Shareholders of the Company, is incorporated herein by reference.

                                       29
<PAGE>

PART  -- IV

ITEM 14  -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) List of documents filed as part of this report

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

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

(b)    Current Report on Form 8-K filed on October 30, 2000, announcing the
       execution of an agreement and plan of merger on October 23, 2000, by
       CaminoReal Bancshares of Texas, Inc. and Sterling Bancshares, Inc.
       providing for the merger of CaminoReal Bancshares with Sterling
       Bancshares.

(c)    Exhibits

2.1    Agreement and Plan of Merger dated as of March 18, 1997, by and among the
       Company, Sterling Bancorporation, Inc. and First Houston Bancshares, Inc.
       [Incorporated by reference to the Company's Registration Statement on
       Form S-4 (File No. 333-28153)]

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

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

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

2.5*   Agreement and Plan of Merger dated as of October 23, 2000 among the
       Company, Sterling Bancorporation, and CaminoReal Bancshares of Texas,
       Inc., as amended.

3.1    Restated and Amended Articles of Incorporation of the Company, as
       amended. [Incorporated by reference to the Company's Annual Report on
       Form 10-K (File No. 000-20750)]

3.2    Restated By-Laws of the Company [Incorporated by reference to Exhibit 4.2
       of the Company's Registration Statement on Form S-8, effective November
       25, 1996 (File No. 333-16719)]

4.1    Form of Indenture to be dated as of June 6, 1997 [Incorporated by
       reference to Exhibit 4.1 to the Company's Registration Statement on Form
       S-3 (File No. 333-27185)]

4.2    Form of Junior Subordinated Debenture [Included as an exhibit to the Form
       of Indenture that is incorporated by reference to Exhibit 4.1 to the
       Company's Registration Statement on Form S-3 (File No. 333-27185)]

4.3    Form of Trust Preferred Securities Guarantee Agreement of the Company
       [Incorporated by reference to Exhibit 4.7 to the Company's Registration
       Statement on Form S-3 (File No. 333-27185)]

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

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

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

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

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]

                                       30
<PAGE>

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*  Letter Agreement dated February 2, 2000 made by and between the Company
       and Wells Fargo Bank Minnesota, National Association regarding a line of
       credit in the amount of $20,000,000

10.6*  First Amendment to Letter Agreement dated February 2, 2001 made by and
       between the Company and Wells Fargo Bank Minnesota, National Association
       regarding a line of credit in the amount of $20,000,000


21*    Subsidiaries of the Company

23.1*  Consent of Deloitte & Touche LLP, Independent Auditors

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

**  Management Compensation Agreement

                                       31
<PAGE>

SIGNATURES

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


                                         STERLING BANCSHARES, INC.

                                         by  /s/ George Martinez
                                            ------------------------------
DATE:  March 23, 2001                    George Martinez,
                                         Chairman


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 23th day of March, 2001.

<TABLE>
<CAPTION>

SIGNATURE                       TITLE                   SIGNATURE                       TITLE
---------                       -----                   ---------                       -----
<S>                             <C>                     <C>                             <C>
/s/ George Martinez             Chairman and Director   /s/ Glenn H. Johnson            Director
-----------------------------                           --------------------------
George Martinez                                         Glenn H. Johnson

/s/ J. Downey Bridgwater        President and Director  /s/ James J. Kearney            Director
-----------------------------                           ---------------------------
J. Downey Bridgwater                                    James J. Kearney

/s/ L. S. "Pat" Brown           Director                /s/ Paul Michael Mann, M.D.     Director
-----------------------------                           ---------------------------
L. S.  "Pat" Brown                                      Paul Michael Mann, M.D.

/s/ John H. Buck                Director                /s/ David B. Moulton             Director
-----------------------------                           ---------------------------
John H. Buck                                            David B. Moulton

                                Director                /s/ G. Edward Powell            Director
-----------------------------                           ----------------------------
James D. Calaway                                        G. Edward Powell

/s/ Charles I. Castro           Director                /s/ Christian A. Rasch          Director
-----------------------------                           ----------------------------
Charles I. Castro                                       Christian A. Rasch

/s/ James M. Clepper            Director                /s/ Thomas A. Reiser            Director
-----------------------------                           ----------------------------
James M. Clepper                                        Thomas A. Reiser

/s/ Walter P. Gibbs, Jr.        Director                /s/ Steven F. Retzloff          Director
-----------------------------                           ----------------------------
Walter P. Gibbs, Jr.                                    Steven F. Retzloff

/s/   Willis J. Hargrave, Jr.   Director                /s/ Raimundo Riojas             Director
-----------------------------                           ----------------------------
Willis J. Hargrave, Jr.                                 Raimundo Riojas

/s/ Bruce J. Harper             Director                /s/ Howard T. Tellepsen, Jr.    Director
-----------------------------                           -----------------------------
Bruce J. Harper                                         Howard T. Tellepsen, Jr.

/s/  David Hatcher              Director
-----------------------------
David Hatcher
</TABLE>


                                       32
<PAGE>

STERLING BANCSHARES, INC.

TABLE OF CONTENTS
--------------------------------------------------------------------------------
                                                                            PAGE
INDEPENDENT AUDITORS' REPORT                                                 38

CONSOLIDATED FINANCIAL STATEMENTS:

 Balance Sheets                                                              39

 Statements of Income                                                        40

 Statements of Shareholders' Equity                                          41

 Statements of Cash Flows                                                    43

 Notes to Consolidated Financial Statements                                  44

                                       33
<PAGE>

INDEPENDENT AUDITORS' REPORT

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

Houston, Texas

We have audited the accompanying consolidated balance sheets of Sterling
Bancshares, Inc. and subsidiaries (the "Company") as of December 31, 2000 and
1999, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2000.  These financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Sterling Bancshares,
Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.

/s/ DELOITTE & TOUCHE LLP
-------------------------
DELOITTE & TOUCHE LLP
Houston, Texas
March 23, 2001

                                       34
<PAGE>

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(In thousands, except share amounts)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

ASSETS
                                                                                                 2000                    1999
                                                                                          ------------------     -------------------
<S>                                                                                       <C>                    <C>
Cash and cash equivalents  (Note C)                                                           $  108,172              $   91,139
Interest-bearing deposits in financial institutions                                                  242                     135
Securities purchased with an agreement to resell                                                  37,863                  40,834
Available-for-sale securities, at fair value (amortized cost of $198,637 and $360,913
  at December 31, 2000 and 1999, respectively) (Note D)                                          200,254                 359,127
Held-to-maturity securities, at amortized cost (fair value of $91,061 and $163,743 at
  December 31, 2000 and 1999, respectively) (Note D)                                              90,927                 166,112
Loans held for sale (Note E)                                                                     139,148                  70,404

Loans held for investment (Notes E and F)                                                      1,228,981               1,124,577
Allowance for credit losses (Note G)                                                             (15,693)                (13,187)
                                                                                              ----------              ----------
     Loans, net                                                                                1,213,288               1,111,390

Accrued interest receivable                                                                       11,121                  11,330
Real estate acquired by foreclosure                                                                1,702                   1,323
Premises and equipment, net (Note H)                                                              44,834                  41,003
Goodwill, net                                                                                      5,952                   6,030
Other assets                                                                                      71,628                  60,653
                                                                                              ----------              ----------
TOTAL ASSETS                                                                                  $1,925,131              $1,959,480
                                                                                              ==========              ==========
LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
  Demand deposits:
    Noninterest-bearing                                                                       $  561,938              $  481,757
    Interest-bearing                                                                             613,179                 581,687
  Certificates of deposit and other time deposits (Note I)                                       402,618                 352,107
                                                                                              ----------              ----------
    Total deposits                                                                             1,577,735               1,415,551
  Other borrowed funds (Note J)                                                                  140,364                 362,332
  Accrued interest payable and other liabilities                                                  17,096                  17,003
                                                                                              ----------              ----------
    Total liabilities                                                                          1,735,195               1,794,886

COMMITMENTS AND CONTINGENCIES (Notes P and Q)

COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED
  SECURITIES (Note K)                                                                             28,750                  28,750

MINORITY INTEREST IN STERLING CAPITAL MORTGAGE COMPANY                                             2,052                   1,301

SHAREHOLDERS' EQUITY (Notes M, N and R):
  Convertible Preferred stock, $1 par value; 1,000,000 shares
    authorized, 50,500 and 88,500 issued and outstanding at
    December 31, 2000 and 1999, respectively                                                          51                      89
  Common stock, $1 par value; 50,000,000 shares authorized,
    26,230,607 and 26,030,342 issued and outstanding at
    December 31, 2000 and 1999, respectively                                                      26,231                  26,030
  Capital surplus                                                                                 29,537                  28,658
  Retained earnings                                                                              102,264                  80,927
  Accumulated other comprehensive income--net unrealized gain
    (loss) on available-for-sale securities, net of tax                                            1,051                  (1,161)
                                                                                              ----------              ----------
    Total shareholders' equity                                                                   159,134                 134,543
                                                                                              ----------              ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                    $1,925,131              $1,959,480
                                                                                              ==========              ==========
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       35
<PAGE>

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(In thousands except per share amounts)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                            2000          1999            1998
                                                                                        -----------    -----------    ------------
<S>                                                                                     <C>            <C>            <C>
Interest income:
  Loans, including fees                                                                   $121,579       $100,075       $ 89,495
  Securities:
    Taxable                                                                                 27,559         16,632         14,642
    Non-taxable                                                                              3,266          3,098          1,708
  Federal funds sold and securities purchased under agreements to resell                     3,988          3,737          4,347
  Deposits in financial institutions                                                            38             79            485
                                                                                          --------       --------        -------
    Total interest income                                                                  156,430        123,621        110,677
                                                                                          --------       --------        -------
Interest expense:
  Demand and savings deposits                                                               18,903         13,255         15,149
  Certificates and other time deposits                                                      20,557         16,501         16,234
  Other borrowed funds                                                                      18,649          5,308            888
  Notes payable and ESOP indebtedness                                                          -               68            175
                                                                                          --------       --------        -------
    Total interest expense                                                                  58,109         35,132         32,446
                                                                                          --------       --------        -------
Net interest income                                                                         98,321         88,489         78,231

Provision for credit losses (Note G)                                                         9,100          8,643          6,232
                                                                                          --------       --------        -------
Net interest income after provision for credit losses                                       89,221         79,846         71,999
                                                                                          --------       --------        -------
Noninterest income:
  Customer service fees                                                                     10,134          9,683          8,999
  Equity in earnings of Sterling Capital Mortgage Company                                      -              -              495
  Gain on sale of mortgage loans                                                            11,959         10,898          5,927
  Other                                                                                     17,474          8,687          6,367
                                                                                          --------       --------        -------
    Total noninterest expense                                                               39,567         29,268         21,788
                                                                                          --------       --------        -------
Noninterest expense:
  Salaries and employee benefits (Note M)                                                   50,250         42,894         34,045
  Occupancy expense                                                                         13,108         10,702          8,600
  Technology                                                                                 3,766          3,968          4,244
  Professional fees                                                                          2,110          1,861          1,961
  Postage and delivery charges                                                               1,716          1,610          1,398
  Supplies                                                                                   1,533          1,606          1,539
  FDIC assessment                                                                              274            366            351
  Net losses and carrying costs of real estate acquired by foreclosure                         293             30            336
  Minority interest expense:
    Company-obligated mandatorily redeemable trust preferred securities
      of subsidiary trust (Note K)                                                           2,668          2,668          2,668
    Sterling Capital Mortgage Company                                                          752            352            304
  Other                                                                                     13,457         11,969         11,126
                                                                                          --------       --------        -------
    Total noninterest expense                                                               89,927         78,026         66,572
                                                                                          --------       --------        -------
Income before income taxes                                                                  38,861         31,088         27,215

Provision for income taxes (Note L)                                                         12,281          9,665          8,910
                                                                                          --------       --------        -------
Net income                                                                                $ 26,580       $ 21,423        $18,305
                                                                                          ========       ========        =======
Earnings per share (Note O):
  Basic                                                                                   $   1.02       $   0.83        $  0.73
                                                                                          ========       ========        =======
  Diluted                                                                                 $   1.00       $   0.81        $  0.70
                                                                                          ========       ========        =======
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       36
<PAGE>

STERLING BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(In thousands except share amounts)
--------------------------------------------------------------------------------



<TABLE>
<CAPTION>
                                                                              CONVERTIBLE
                                                                            PREFERRED STOCK                  COMMON STOCK
                                                                       ----------------------------     ------------------------
                                                                          SHARES          AMOUNT          SHARES        AMOUNT
                                                                       ------------    ------------     ---------    -----------
<S>                                                                    <C>             <C>              <C>          <C>
BALANCE AT JANUARY 1, 1998                                                  177             $ 177         24,525        $24,525
  Net income
  Net change in unrealized gain (loss)
   on available-for-sale securities, net of tax
      Total comprehensive income
  Issuance of common stock (Note N)                                                                          360            360
  Common stock issued in exchange for an additional 40 percent
   interest in SCMC (Note B)                                                                                 296            296
  Redemption of common stock                                                                                  (4)            (4)
  Sale of preferred stock                                                    87                87
  Conversion of preferred stock to common stock                            (127)             (127)           349            349
  Cash dividends paid
  ESOP indebtedness repayments
                                                                           ----             -----         ------        -------
BALANCE AT DECEMBER 31, 1998                                                137               137         25,526         25,526

  Net income
  Net change in unrealized gain (loss)
   on available-for-sale securities, net of tax
      Total comprehensive income
  Issuance of common stock (Note M)                                                                          420            420
  Sale of preferred stock                                                     2                 2
  Conversion of preferred stock to common stock                             (50)              (50)            84             84
  Cash dividends paid
  ESOP indebtedness repayments
                                                                           ----             -----         ------        -------
BALANCE AT DECEMBER 31, 1999                                                 89                89         26,030         26,030

  Net income
  Net change in unrealized gain (loss) on
   available-for-sale securities, net of tax
      Total comprehensive income
  Issuance of common stock (Note M)                                                                          153            153
  Sale of preferred stock                                                    39                39
  Conversion of preferred stock to common stock                             (77)              (77)            93             93
  Cash dividends paid
  Purchase of treasury stock                                                                                 (45)           (45)
                                                                           ----             -----         ------        -------
BALANCE AT DECEMBER 31, 2000                                                 51             $  51         26,231        $26,231
                                                                           ====             =====         ======        =======
</TABLE>

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       37
<PAGE>

<TABLE>
<CAPTION>
                                                                     ACCUMULATED OTHER
                                                                   COMPREHENSIVE INCOME-
                                                                    NET UNREALIZED GAIN
                                                                   (LOSS) ON AVAILABLE-FOR-
  CAPITAL          RETAINED               ESOP                        SALE SECURITIES,          TOTAL SHAREHOLDERS'
  SURPLUS          EARNINGS           INDEBTEDNESS                      NET OF TAX                    EQUITY
-----------      -----------        ---------------                ------------------------     -------------------
<S>              <C>                <C>                            <C>                          <C>
  $19,638         $ 49,815              $(321)                           $   (22)                     $ 93,812
                    18,305                                                                              18,305

                                                                             425                           425
                                                                                                      --------
                                                                                                        18,730
                                                                                                      --------
    2,031                                                                                                2,391

    4,333                                                                                                4,629
      (18)                                                                                                 (22)
    1,276                                                                                                1,363
     (222)                                                                                                 -
                    (4,105)                                                                             (4,105)
                                          135                                                              135
  -------         --------              -----                            -------                      --------
   27,038           64,015               (186)                               403                       116,933

                    21,423                                                                              21,423

                                                                          (1,564)                       (1,564)
                                                                                                      --------
                                                                                                        19,859
                                                                                                      --------
    1,625                                                                                                2,045
       29                                                                                                   31
      (34)                                                                                                 -
                    (4,511)                                                                             (4,511)
                                          186                                                              186
  -------         --------              -----                            -------                      --------
   28,658           80,927                -                               (1,161)                      134,543

                    26,580                                                                              26,580

                                                                           2,212                         2,212
                                                                                                      --------
                                                                                                        28,792
                                                                                                      --------
    1,116                                                                                                1,269
      346                                                                                                  385
      (16)                                                                                                 -
                    (5,243)                                                                             (5,243)
     (567)                                                                                                (612)
  -------         --------              -----                            -------                      --------
  $29,537         $102,264              $ -                              $ 1,051                      $159,134
  =======         ========              =====                            =======                      ========
</TABLE>

                                       38
<PAGE>

STERLING BANCSHARES,INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(IN THOUSANDS)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES:                                              2000              1999             1998
                                                                               -----------        ----------        ---------
<S>                                                                            <C>                <C>               <C>
  Net income                                                                    $  26,580          $  21,423        $  18,305
  Adjustments to reconcile net income to net cash provided by
   (used in) operating activities:
    Amortization and accretion of premiums and discounts on securities, net           276                404              323
    Provision for credit losses                                                     9,100              8,643            6,232
    Deferred income tax expense                                                      (193)            (1,698)          (1,287)
    Equity in undistributed earnings from Sterling Capital Mortgage Company           -                  -               (470)
    Gain on sale of assets                                                        (12,019)           (11,376)          (6,056)
    Gain on the sale of University of Houston office location                         -                 (450)             -
    Depreciation and amortization                                                   7,472              5,923            6,163
    Write-down of real estate acquired by foreclosure                                 254                -                 75
    Net loans originated or purchased for sale or resale                          (56,785)            14,432           (8,735)
    Increase in accrued interest receivable and other assets                       (6,146)           (21,387)          (3,471)
    Increase in accrued interest payable and other liabilities                        844              6,220              738
                                                                                ---------          ---------        ---------
      Net cash (used in) provided by operating activities                         (30,617)            22,134           11,817

CASH FLOWS FROM INVESTING ACTIVITIES:
    Increase in securities purchased under agreements to resell                     2,971             (7,842)         (17,496)
    Proceeds from maturities and principal paydowns of
     held-to-maturity securities                                                   18,831             23,586           82,464
    Purchases of held-to-maturity securities                                          -              (32,046)         (33,259)
    Proceeds from sale of available-for-sale securities                           158,374                -                -
    Proceeds from maturities and principal paydowns
     of available-for-sale securities                                              71,980             37,690           77,425
    Purchases of available-for-sale securities                                    (11,986)          (306,952)         (65,697)
    Net increase in loans                                                        (112,190)          (178,987)        (156,550)
    Purchase of Bank Owned Life Insurance                                          (5,988)           (25,606)             -
    Proceeds from sale of real estate acquired by foreclosure                         605              1,451            1,589
    Net (increase) decrease in interest-bearing deposits in
     financial institutions                                                          (107)               465             (191)
    Cash and cash equivalents acquired with Sterling Capital Mortgage Company         -                  -              1,219
    Proceeds from sale of University of Houston office location                       -                5,545              -
    Proceeds from sale of premises and equipment                                      375              3,041              820
    Purchase of premises and equipment                                            (11,230)           (10,150)          (7,650)
                                                                                ---------          ---------        ---------
      Net cash provided by (used in) investing activities                         111,635           (489,805)        (117,326)

CASH FLOWS FROM FINANCING ACTIVITIES:
    Net increase in deposit accounts                                              162,184             76,439          125,487
    Net increase (decrease) in repurchase agreements and federal funds
     purchased                                                                   (221,968)           346,999          (31,741)
    Repayments of notes payable                                                       -               (1,883)            (417)
    Proceeds from issuance of common and preferred stock                            1,654              2,076            3,754
    Redemption of common stock                                                        -                  -                (23)
    Purchase of treasury stock                                                       (612)               -                -
    Payments of cash dividends                                                     (5,243)            (4,511)          (4,105)
                                                                                ---------          ---------        ---------
      Net cash (used in) provided by financing activities                         (63,985)           419,120           92,955
                                                                                ---------          ---------        ---------
Net increase (decrease) in cash and cash equivalents                               17,033            (48,551)         (12,554)
Cash and cash equivalents at beginning of year                                     91,139            139,690          152,244
                                                                                ---------          ---------        ---------
Cash and cash equivalents at end of year                                        $ 108,172          $  91,139        $ 139,690
                                                                                =========          =========        =========
Supplemental information:
     Income taxes paid                                                          $  18,700          $   7,250        $   9,206
                                                                                =========          =========        =========
     Interest paid                                                              $  58,349          $  33,793        $  30,013
                                                                                =========          =========        =========
     Noncash investing and financing activities:
       Acquisition of real estate through foreclosure of collateral             $   1,192          $     643        $   2,694
                                                                                =========          =========        =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       39
<PAGE>

STERLING BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------

A. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

   ORGANIZATION - Sterling Bancshares, Inc. (hereinafter, collectively with its
   subsidiaries, the "Company" or "Bancshares"), headquartered in Houston,
   Texas, is a bank holding company that provides commercial and retail banking
   services in the Houston metropolitan area through the community banking
   offices of Sterling Bank, a banking association chartered under the laws of
   the State of Texas ("Bank"). In December 2000, the Bank began operations in
   Dallas, Texas. Also, the Company provides mortgage banking services through
   its 80 percent ownership of Sterling Capital Mortgage Company ("SCMC").

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

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

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

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

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

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

   INVESTMENT IN STERLING CAPITAL MORTGAGE COMPANY - In September 1996, the
   Company acquired a 40 percent equity and 44 percent voting interest in SCMC.
   On July 2, 1998, the Company acquired

                                       40
<PAGE>

   an additional 40 percent interest, increasing its total ownership to 80
   percent. The consolidated income statements include the Company's 40 percent
   share of SCMC's equity earnings from the initial acquisition through July 1,
   1998 using the equity method of accounting. Beginning July 2, 1998, SCMC's
   financial statements are fully consolidated with the Company's and the
   remaining 20 percent ownership is shown as minority interest.

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

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

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

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

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

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

   ALLOWANCE FOR CREDIT LOSSES - The allowance for credit losses is a valuation
   allowance for probable losses incurred on loans.  All losses are charged to
   the allowance when the loss actually occurs or

                                       41
<PAGE>

   when a determination is made that a probable loss has occurred. Recoveries
   are credited to the allowance at the time of recovery.

   Throughout the year, management estimates the probable level of losses to
   determine whether the allowance for credit losses is adequate to absorb
   losses in the existing portfolio.  Based on these estimates, an amount is
   charged to the provision for credit losses and credited to the allowance for
   credit losses in order to adjust the allowance to a level determined to be
   adequate to absorb losses.

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

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

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

   GOODWILL - Goodwill is amortized using the straight-line method over a period
   of 10 to 25 years.  Management periodically performs an evaluation to
   determine whether any impairment of goodwill has occurred.  If any such
   impairment is identified, a write-down of the goodwill is recorded.

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

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

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

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

                                       42
<PAGE>

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

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

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

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

   EARNINGS PER SHARE - Basic earnings per share is computed using the weighted
   average number of shares outstanding.  Diluted earnings per share is computed
   using the weighted average number of shares outstanding adjusted for the
   incremental shares issuable upon conversion of preferred stock and issuable
   upon exercise of outstanding stock options.

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

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

   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 - Effective October 1, 2000, the Company adopted
   SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
   which establishes accounting and reporting standards for derivative
   instruments and requires that an entity recognize all derivatives as either
   assets or liabilities in the balance sheet and measure those instruments at
   fair value.  Upon implementation of SFAS No. 133, $56.1 million of securities
   classified as held-to-maturity were redesignated as available-for-sale or
   trading.  The securities had a fair value of $56.1 million.  The company has
   no derivative instruments.  Management believes the implementation of this
   pronouncement did not have any other material effect on the Company's
   financial statements.

   Effective January 1, 2000, the Company adopted SFAS No. 140, "Accounting for
   Transfers and Servicing of Financial Assets and Extinguishments of
   Liabilities".   This Statement provides accounting and reporting standards
   for transfers and servicing of financial assets and extinguishments of
   liabilities.  Those standards are based on consistent application of a
   financial-components approach that focuses on control.  Under that approach,
   after a transfer of financial assets, an entity recognizes the financial and
   servicing assets it controls and the liabilities it has incurred,
   derecognizes financial assets when control has been surrendered, and
   derecognizes liabilities when extinguished.  This Statement provides
   consistent standards for distinguishing transfers of financial assets that
   are sales from transfers that are secured borrowings.  Management

                                       43
<PAGE>

   believes the implementation of this pronouncement did not have a material
   effect on the Company's financial statements.

B. ACQUISITIONS

   The following table shows transactions that have been accounted for using the
   pooling of interests method.  The consolidated financial statements have been
   restated to present the combined financial information of the Company and the
   acquired entities.  There were no material adjustments to the net assets of
   the acquired entities as a result of adopting the same accounting practices
   as the Company.

<TABLE>
<CAPTION>

                                                             SHARES OF                                    TOTAL DEPOSITS
                                                          COMPANY COMMON          TOTAL ASSETS AT        AT ACQUISITION
   ACQUIRED ENTITY              ACQUISITION DATE           STOCK ISSUED          ACQUISITION DATE             DATE
   ---------------              ----------------         ---------------         ----------------        ---------------
<S>                            <C>                      <C>                     <C>                    <C>
Humble National Bank           June 30, 1998                   855,000           $ 54 million          $  49 million
Hometown Bancshares, Inc. (1)  November 20, 1998             1,375,000             92 million             84 million
B.O.A. Bancshares, Inc. (2)    June 1, 1999                  1,854,600            115 million            103 million
------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)   Hometown Bancshares, Inc. was the bank holding company for Clear Lake
      National Bank.
(2)   B.O.A.  Banchares, Inc.  was the bank holding company for Houston
      Commerce Bank.

   On July 2, 1998, the Company acquired an additional 40 percent of Sterling
   Capital Mortgage Company ("SCMC") in exchange for 296,287 shares of the
   Company's common stock valued at approximately $4.6 million.  As a result of
   the transaction, the Company owned 80 percent of SCMC.  The transaction has
   been accounted for as a purchase.  This transaction resulted in $4.7 million
   in goodwill, which is being amortized over 20 years.  The results of
   operations from SCMC are included in the consolidated statements of the
   Company beginning July 2, 1998.  If the results of operations of SCMC had
   been included in consolidated income as though the acquisition of the
   additional 40 percent had occurred January 1, 1998, there would have been no
   material change in reported net income and earnings per share for 1998.

   On March 22, 2001, the Company acquired CaminoReal Bancshares of Texas, Inc.
   ("CaminoReal") and its subsidiary bank, CaminoReal Bank, National
   Association, for an aggregate cash purchase price of $51.8 million.
   CaminoReal Bank has four banking offices in San Antonio, Texas and four
   banking offices in the south Texas cities of Eagle Pass, Carrizo Springs,
   Crystal City and Pearsall. The Company anticipates completing operational
   integration of CaminoReal Bank and Sterling Bank in the second quarter of
   2001.

C. CASH AND CASH EQUIVALENTS

   The Bank is required by the Board of Governors of the Federal Reserve System
   (the "FRB") to maintain average reserve balances.  "Cash and cash
   equivalents" in the consolidated balance sheets includes amounts so
   restricted of approximately $500 thousand at December 31, 2000 and December
   31, 1999.

                                       44
<PAGE>

D. SECURITIES

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

<TABLE>
<CAPTION>
                                                                                December 31, 2000
                                                   ------------------------------------------------------------------------
                                                                              GROSS            GROSS
                                                      AMORTIZED            UNREALIZED        UNREALIZED
                                                         COST                 GAINS            LOSSES          FAIR VALUE
                                                   -------------         -------------     -------------     --------------
<S>                                                <C>                   <C>               <C>               <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities and obligations
     of U.S. government agencies                    $ 19,072                 $  268            $   65            $ 19,275
Obligations of states and political
     subdivisions                                        703                     21                 -                 724
Mortgage-backed securities and
     collateralized mortgage obligations             166,301                  1,806               413             167,694
Federal Home Loan Bank stock and other
     equity securities                                12,561                      -                 -              12,561
                                                    --------                 ------            ------            --------
Total                                               $198,637                 $2,095            $  478            $200,254
                                                    ========                 ======            ======            ========
HELD-TO-MATURITY
U.S. Treasury securities and obligations
     of U.S. government securities                  $  8,004                 $   47            $    -            $  8,051
Obligations of states and political
     subdivisions                                     73,000                    425               163              73,262
Mortgage-backed securities and
     collateralized mortgage obligations               9,923                      2               177               9,748
                                                    --------                 ------            ------            --------
Total                                               $ 90,927                 $  474            $  340            $ 91,061
                                                    ========                 ======            ======            ========
</TABLE>


<TABLE>
<CAPTION>

                                                                                December 31, 2000
                                                   ------------------------------------------------------------------------
                                                                              GROSS            GROSS
                                                      AMORTIZED            UNREALIZED        UNREALIZED
                                                         COST                 GAINS            LOSSES          FAIR VALUE
                                                   -------------         -------------     -------------     --------------
<S>                                                <C>                   <C>               <C>               <C>
AVAILABLE-FOR-SALE
U.S. Treasury securities and obligations
     of U.S. government agencies                    $ 51,809                 $    2            $1,039            $ 50,772
Obligations of states and political
     subdivisions                                        780                      6                12                 774
Mortgage-backed securities
     collateralized mortgage obligations             292,049                  1,165             1,908             291,306
Federal Home Loan Bank stock and other
     equity securities                                16,275                      -                 -              16,275
                                                    --------                 ------            ------            --------
Total                                               $360,913                 $1,173            $2,959            $359,127
                                                    ========                 ======            ======            ========
HELD-TO-MATURITY
U.S. Treasury securities and obligations
     of U.S. government agencies                    $ 56,864                 $   17            $  367            $ 56,514
Obligations of states and political
     subdivisions                                     76,037                    142             1,833              74,346
Mortgage-backed securities and
     collateralized mortgage obligations              33,211                    165               493              32,883
                                                    --------                 ------            ------            --------
Total                                               $166,112                 $  324            $2,693            $163,743
                                                    ========                 ======            ======            ========
</TABLE>

                                       45
<PAGE>

   The amortized cost and fair value of securities at December 31, 2000, by
   contractual maturity, are shown below.  Expected maturities will differ from
   contractual maturities because borrowers may have the right to call or prepay
   obligations with or without call or prepayment penalties.  All amounts are
   shown in thousands.

<TABLE>
<CAPTION>
                                                             HELD-TO-MATURITY                   AVAILABLE-FOR-SALE
                                                      -------------------------------      -----------------------------
                                                        AMORTIZED                            AMORTIZED
                                                          COST           FAIR VALUE            COST          FAIR VALUE
                                                      ------------    ---------------      -------------   -------------
   <S>                                                <C>             <C>                  <C>             <C>
   Due in one year or less                              $ 6,331           $ 6,346            $     50         $     50
   Due after one year through five years                 48,676            48,751              19,072           19,275
   Due after five years thruogh ten years                25,936            26,155                 -                -
   Due after ten years                                       61                61                 653              674
   Mortgage-backed securities and collateralized
    mortgage obligations                                  9,923             9,748             166,301          167,694
   FHLB stock and other equity securities                   -                 -                12,561           12,561
                                                        -------           -------            --------         --------
                                                        $90,927           $91,061            $198,637         $200,254
                                                        =======           =======            ========         ========
</TABLE>

   The Company does not own any securities of any one issuer (other than the
   U.S. government and its agencies) of which aggregate adjusted cost exceeds
   10% of the consolidated shareholders' equity at December 31, 2000 or 1999.

   Securities with carrying values totaling $235.7 million and fair values
   totaling $237.0 million at December 31, 2000 were pledged to secure public
   deposits, securities sold under repurchase agreements and Federal Home Loan
   Bank advances.

E. LOANS

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


                                                     DECEMBER 31,
                                              ---------------------------
                                                 2000             1999
                                              ----------       ----------
Commercial, financial and industrial          $  435,676       $  411,324
Real estate - commercial                         402,765          339,593
Real estate - mortgage                           145,784          137,848
Real estate - construction                       122,800          110,850
Consumer                                         116,828          119,463
Foreign commercial and industrial                  4,807            5,917
Unearned premium (discount)                          321             (418)
                                              ----------       ----------
    Total loans held for investment            1,228,981        1,124,577
Loans held for sale                              139,148           70,404
                                              ----------       ----------
    Total loans                               $1,368,129       $1,194,981
                                              ==========       ==========

   The recorded investment in impaired loans under SFAS No. 114 is approximately
   $46.8 million and $30.8 million, at December 31, 2000 and 1999, respectively.
   Under SFAS No. 114, such impaired loans required an allowance for credit
   losses of approximately $8.7 million and $6.7 million, respectively.

                                       46
<PAGE>

   The average recorded investment in impaired loans for the years ended
   December 31, 2000, 1999 and 1998 was $39.7 million, $28.1 million and $20.1
   million, respectively.

   Loan maturities and rate sensitivity of the loan portfolio, excluding real
   estate - mortgage, consumer and foreign loans and unearned discount, at
   December 31, 2000 are as follows (in thousands):

<TABLE>
<CAPTION>

                                                                  DUE AFTER ONE
                                           DUE IN ONE YEAR       YEAR THROUGH           DUE AFTER
                                              OR LESS              FIVE YEARS           FIVE YEARS           TOTAL
                                          ----------------      ----------------       --------------        -----
<S>                                       <C>                   <C>                    <C>                 <C>
Commercial, financial and industrial        $  311,416              $  116,999            $ 7,249           $435,664
Real estate - commercial                       189,758                 197,382             15,358            402,498
Real estate - construction                      77,660                  43,074              1,911            122,645
                                            ----------              ----------            -------           --------
Total                                       $  578,834              $  357,455            $24,518           $960,807
                                            ==========              ==========            =======           ========

Loans with a fixed interest rate            $   95,859              $  357,138            $24,425           $477,422
Loans with a floating interest rate            482,975                     317                 93            483,385
                                            ----------              ----------            -------           --------
Total                                       $  578,834              $  357,455            $24,518           $960,807
                                            ==========              ==========            =======           ========
</TABLE>

   As of December 31, 2000 and 1999, loans outstanding to directors, officers
   and their affiliates were approximately $11.0 million and $10.6 million,
   respectively.  In the opinion of management, all transactions entered into
   between the Bank and such related parties have been and are, in the ordinary
   course of business, made on the same terms and conditions as similar
   transactions with unaffiliated persons.

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

                                                   YEAR ENDED
                                                  DECEMBER 31,
                                               -------------------
                                                 2000        1999
                                               --------    -------
Beginning balance                              $10,632     $ 7,764
New loans and reclassified related loans         8,810       8,621
Repayments                                      (8,422)     (5,753)
                                               -------     -------
Ending balance                                 $11,020     $10,632
                                               =======     =======

F. NONACCRUAL, PAST-DUE AND RESTRUCTURED LOANS

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

                                                     YEAR ENDED
                                                    DECEMBER 31,
                                                 ------------------
                                                  2000        1999
                                                 ------      ------
Nonaccrual loans                                 $8,081      $5,501
Loans 90 days or more past due, not on
 nonaccrual status                                  604         351
Restructured loans, performing                    1,298         218
                                                 ------      ------
                                                 $9,983      $6,070
                                                 ======      ======

                                       47
<PAGE>

   As of December 31, 2000 and 1999, interest foregone on nonaccrual loans was
   $463 thousand and $356 thousand, respectively.

G. ALLOWANCE FOR CREDIT LOSSES

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

                                                   YEAR ENDED
                                                  DECEMBER 31,
                                      ----------------------------------
                                       2000           1999         1998
                                      -------       -------      -------
Balance at beginning of year          $13,187       $10,829      $ 8,278
    Provisions                          9,100         8,643        6,232
    Loans charged off                   7,453         7,120        4,288
    Loan recoveries                      (859)         (835)        (607)
                                      -------       -------      -------
      Net loans charged off             6,594         6,285        3,681
                                      -------       -------      -------
Balance at end of year                $15,693       $13,187      $10,829
                                      =======       =======      =======

H. PREMISES AND EQUIPMENT

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

                                                     DECEMBER 31,
                                                 --------------------
                                                   2000         1999
                                                 --------     -------
Land                                              $ 9,679     $ 9,646
Buildings and improvements                         30,981      27,896
Furniture, fixtures and equipment                  35,412      29,243
                                                  -------     -------
                                                   76,072      66,785

Less accumulated depreciation and amortization     31,238      25,782
                                                  -------     -------
Total                                             $44,834     $41,003
                                                  =======     =======

I.  DEPOSITS

   Included in certificates of deposit and other time deposits are certificates
   of deposit in amounts of $100,000 or more.  The remaining maturities of these
   certificates are summarized as of December 31, 2000 as follows (in
   thousands):


   Three months or less                  $145,014
   Four through six months                 50,502
   Seven through twelve months             37,163
   Thereafter                              15,476
                                         --------
                                         $248,155
                                         ========

   Interest expense for certificates of deposit in excess of $100,000 was
   approximately $12.0 million, $8.4 million, and $8.1 million for the years
   ended December 31, 2000, 1999 and 1998, respectively.

   The Bank has no brokered deposits and there are no major concentrations of
   deposits.

                                       48
<PAGE>

J. OTHER BORROWED FUNDS

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

<TABLE>
<CAPTION>
                                                           2000            1999
                                                         --------        --------
   <S>                                                   <C>             <C>
   Federal Home Loan Bank advances                       $128,000        $318,495
   Securities sold under agreements to repurchase           8,745           8,837
   Promissory notes payable to unaffiliated third party     3,619          35,000
                                                         --------        --------
                                                         $140,364        $362,332
                                                         ========        ========
</TABLE>

   The Bank has an available line of credit with the Federal Home Loan Bank of
   Dallas, which allows the Bank to borrow on a collateralized basis.  At
   December 31, 2000, the Bank had $128 million, bearing an interest rate of
   6.74%, borrowed under this line of credit, with a maturity of four days.
   This amount was repaid in January 2001.

   Securities sold under agreements to repurchase generally mature within one to
   four days from the transaction date. Information concerning securities sold
   under agreements to repurchase is summarized as follows (dollars in
   thousands):

                                                        2000            1999
                                                      --------        --------
   Average balance during the year                    $ 10,124        $ 11,038
   Average interest rate during the year                  5.52%           4.16%
   Maximum month-end balance during the year          $  8,745        $ 11,553
   Average interest rate at the end of the year           5.94%           4.82%

   At December 31, 2000, the Bank has two promissory notes outstanding bearing
   an interest rate of 5.81%.  These notes matured and were repaid in February
   2001.

   Finally, the Bank has available lines for federal funds purchased at
   correspondent banks.  These funds are generally outstanding for periods of
   less than one week.  As of December 31, 2000, there were no outstanding
   balances related to these lines.

K. TRUST PREFERRED SECURITIES

   In June 1997, the Company formed Sterling Bancshares Capital Trust I, a trust
   formed under the laws of the State of Delaware (the "Trust").  The Trust
   issued $28,750,000 of 9.28% Trust Preferred Securities and invested the
   proceeds thereof in the 9.28% Junior Subordinated Deferrable Interest
   Debentures (the "Junior Subordinated Debentures") issued by the Company.  The
   Junior Subordinated Debentures will mature on June 6, 2027, which date may be
   shortened to a date not earlier than June 6, 2002 if certain conditions are
   met (including the Company having received prior approval of the Federal
   Reserve and any other required regulatory approvals).  The Trust Preferred
   Securities will be subject to mandatory redemption if the Junior Subordinated
   Debentures are repaid by the Company.  The Junior Subordinated Debentures may
   be prepaid if certain events occur, including a change in the tax status or
   regulatory capital treatment of the Trust Preferred Securities.  In each
   case, redemption will be made at par, plus the accrued and unpaid
   distributions thereon through the redemption date.

                                       49
<PAGE>

L. INCOME TAXES

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

                                           YEAR ENDED DECEMBER 31,
                                     -----------------------------------
                                      2000           1999         1998
                                     ------         ---------     ------
   Current expense                   $12,474        $11,363      $ 9,961
   Deferred benefit                     (193)        (1,698)      (1,051)
                                     -------        -------      -------
       Total                         $12,281        $ 9,665      $ 8,910
                                     =======        =======      =======

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

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                      ------------------------------------------
                                                                       2000              1999               1998
                                                                      ------             -----             ------
<S>                                                                  <C>                <C>                 <C>
Taxes calculated at statutory rate                                   $13,601            $10,881            $ 9,529
Increase (decrease) resulting from:
    Tax-exempt interest income                                        (1,143)              (979)              (618)
    Tax-exempt income  from bank-owned life insurance                   (661)              (212)               -
    Goodwill amortization                                                157                151                130
    Adjustments to valuation  allowance                                  -                  -                 (230)

    Other, net                                                           327               (176)                99
                                                                     -------             -------           -------
Income tax expense                                                   $12,281             $ 9,665           $ 8,910
                                                                     =======             =======           =======
</TABLE>

   Significant deferred tax assets and liabilities at December 31, 2000 and
   1999, were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                                         ----------------------
                                                                         2000              1999
                                                                         ----              ----
<S>                                                                      <C>               <C>
Deferred tax assets:
 Net unrealized loss on available-for-sale securities                 $     -            $   625
 Real estate acquired by foreclosure                                      143                 99
 Allowance for credit losses                                            5,492              4,437
 Netoperating loss carry forward                                          215                257
 Deferred compensation                                                    552                429
 Other                                                                      -                  2
                                                                       ------             ------
   Total deferred tax assets                                            6,402              5,849
Deferred tax liabilities:
 Net unrealized gains on available-for-sale securities                    566                  -
 Depreciable assets                                                       907                636
 Earnings from Sterling Capital Mortgage Company                          396                396
 Federal Home Loan Bank stock dividends                                   711                263
 Other                                                                    412                146
                                                                       ------             ------
   Total deferred tax liabilities                                       2,992              1,441
                                                                       ------             ------
Net deferred tax assets before valuation allowance                      3,410              4,408
Valuation allowance                                                       262                262
                                                                       ------             ------
Net deferred tax assets                                                $3,148             $4,146
                                                                       ======             ======
</TABLE>

                                       50
<PAGE>

M. EMPLOYEE BENEFITS

   PROFIT SHARING PLAN - The Company's profit sharing plan includes
   substantially all employees.  Contributions to the plan are made at the
   discretion of the Board of Directors but generally equal up to 10% of the
   Company's pretax income, subject to IRS limitations.  Employee contributions
   to 401(K) plan accounts are optional.  Beginning in 1997, the Company matched
   50 percent of the employee's contribution, up to 6 percent of the employee's
   base pay.  Profit sharing contributions are accrued and funded currently.
   Total profit sharing expense for 2000, 1999 and 1998 was approximately $2.9
   million, $2.5 million, and $2.3 million, respectively.

   STOCK-BASED COMPENSATION - During April 1994, the Company adopted the "1994
   Stock Incentive Plan" (the "Stock Plan").  The Stock Plan provides for a
   maximum of 2,000,000 shares of the Company's common stock to be issued.  No
   options or performance shares may be granted  under the Stock Plan after
   April 2004.  Options are granted to officers and employees at exercise prices
   determined by the Compensation Committee of the Board of Directors.  These
   options generally have exercise prices equal to the fair market value of the
   common stock at the date of grant and vest ratably over a four-year period.
   Options granted under the plan must be exercised not later than ten years
   from the date of grant.  Stock grant awards may also be made under the Stock
   Plan with compensation expense recognized for any stock grant awards.  A
   total of 4,250, 200, and 1,400 stock grants were awarded under the Stock Plan
   during 2000, 1999 and 1998, respectively.

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

<TABLE>
<CAPTION>
                                                                                      YEAR ENDED DECEMBER 31,
                                                      -----------------------------------------------------------------------------
                                                              2000                         1999                      1998
                                                      --------------------------     ----------------------  ----------------------
                                                                    WEIGHTED                   WEIGHTED                 WEIGHTED
                                                                    AVERAGE                    AVERAGE                  AVERAGE
                                                      SHARES     EXERCISE PRICE      SHARES  EXERCISE PRICE  SHARES  EXERCISE PRICE
                                                     ---------  ----------------     ------ ---------------- ----------------------
<S>                                                   <C>            <C>              <C>         <C>          <C>        <C>
Shares under option, beginning of year                1,049          $ 9.18           951       $ 7.50       1,134       $ 4.68
    Shares granted                                      303           11.82           320        12.07         225        14.68
    Shares canceled/expired                             (53)          11.41           (73)       11.82         (74)        4.56
    Shares exercised                                    (99)           4.97          (149)        3.47        (334)        3.42
                                                     ------          ------        ------       ------       -----       ------
Shares under option, end of year                      1,200          $ 9.68         1,049       $ 9.18         951       $ 7.50
                                                     ======          ======        ======       ======       =====       ======
Shares exercisable, end of year                         580                           502                      423
                                                     ======                        ======                    =====
Shares reserved for future granting
    of options, end of year                             410                           713                    1,033
                                                     ======                        ======                    =====

Weighted average fair value of options
    granted during the year                                          $ 4.21                     $ 3.87                   $ 5.09
                                                                     ======                     ======                   ======

Range of exercise prices of options
    granted during the year                              $ 8.88 - $19.97         $10.38 - $14.84         $12.63 - $17.38


Range of exercise prices of options
    exercised during the year                            $ 1.05 - $13.75         $ 0.95 - $12.66         $ 0.95 - $13.88
</TABLE>

   If compensation cost for the Company's stock-based compensation plan had been
   determined based on the fair value at the grant dates for awards, there would
   have been no material impact on the Company's reported net income or earnings
   per share.

                                       51
<PAGE>

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

                                       2000        1999        1998
                                       ----        ----        -----
        Expected life (years)          5.17         5.51       7.57
        Risk free interest rate        5.03%        6.63%      4.64%
        Volatility                    28.97%       26.88%     26.23%
        Dividend yield                 1.11%        1.79%      1.19%

   STOCK PURCHASE PLAN - The Company offers the 1994 Employee Stock Purchase
   Plan (the "Purchase Plan"), which is a compensatory benefit plan, to all
   employees who are employed for more than 20 hours per week and meet minimum
   length-of-service requirements of three months.  The Purchase Plan provides
   for an aggregate of 675,000 shares of the Company's common stock to be issued
   under the Plan with no more than 67,500 shares available during any annual
   offering.  The purchase price for shares available under the Purchase Plan is
   equal to the fair market value on the date of the offering.  During 2000 and
   1999, 4,311 and 5,091 shares, respectively, were purchased and 7,426 and
   21,298 shares, respectively, were subscribed for through payroll deduction
   for a maximum of two years.  Shares are issued upon full payment.

N. SHAREHOLDERS' EQUITY

   STOCK SPLITS - The Board of Directors declared stock splits effected in the
   form of stock dividends as follows:

   DECLARATION DATE            SPLIT RATIO           DISTRIBUTION DATE
   -------------------     -----------------     -----------------------
   January 26, 1998              3-for-2            February 20, 1998

   PREFERRED STOCK - The Board of Directors has approved the sale of convertible
   preferred stock in series pursuant to confidential private placement
   memoranda upon the opening of various banking offices.  The shares are sold
   to investors who may assist in the business development efforts of the
   opening office and are convertible to common shares dependent on that banking
   office meeting certain performance and deposit growth goals.  During 2000,
   77,000 shares of preferred stock under Series E, Series F and Series G issued
   in 1998 were converted into 92,750 common shares.  At December 31, 2000,
   there are 50,500 convertible preferred shares outstanding.  These shares are
   convertible into a maximum of 63,125 shares of common stock if the
   performance and deposit growth goals of the banking offices are achieved.

                                       52
<PAGE>

O. EARNINGS PER COMMON SHARE

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


<TABLE>
<CAPTION>

                                                                   2000                 1999                   1998
                                                         ---------------------------------------------------------------------
                                                            AMOUNT    PER SHARE    AMOUNT   PER SHARE    AMOUNT    PER SHARE
                                                         ---------------------------------------------------------------------
<S>                                                         <C>        <C>         <C>          <C>      <C>           <C>
Net income                                                 $26,580                $21,423                $18,305
                                                           =======                =======                =======
Basic:
 Weighted average shares outstanding                        26,144     $1.02       25,806      $0.83      25,234      $0.73
                                                                       =====                   =====                  =====
Diluted:
 Add incremental shares for:
   Assumed exercise of outstanding options                     340                    365                    567
   Assumed conversion of preferred stock                        71                    166                    397
                                                           -------                -------                -------
Total                                                       26,555     $1.00       26,337      $0.81      26,198      $0.70
                                                           =======     =====      =======      =====     =======      =====

</TABLE>

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

P. COMMITMENTS AND CONTINGENCIES

   LEASES - A summary as of December 31, 2000, of noncancelable future operating
   lease commitments follows (in thousands):


               2001                                  $ 2,526
               2002                                    2,508
               2003                                    2,658
               2004                                    2,448
               2005                                    1,838
               Thereafter                              7,632
                                                     -------
               Total                                 $19,610
                                                     =======

   Rent expense under all noncancelable operating lease obligations, net of
   income from noncancelable subleases aggregated, was approximately $3.6
   million, $2.2 million, and $1.5 million for the years ended December 31,
   2000, 1999 and 1998, respectively.

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

Q. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

   The Bank is a party to various financial instruments with off-balance sheet
   risk in the normal course of business to meet the financial needs of its
   customers.  These financial instruments include commitments to extend credit
   and standby letters of credit.  These instruments involve, to varying
   degrees, elements of credit and interest rate risk in excess of the amounts
   recognized in the consolidated balance sheets.  The Bank's exposure to credit
   loss in the event of nonperformance by

                                       53
<PAGE>

   the other party to the financial instrument for commitments to extend credit
   is represented by the contractual notional amount of these instruments. The
   Bank uses the same credit policies in making these commitments and
   conditional obligations as it does for on-balance sheet instruments.

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

                                                         DECEMBER 31,
                                                      -------------------
                                                      2000           1999
                                                      ----           ----
    Financial instruments whose contract amount
       represents credit risk:
         Commitments to extend credit               $206,810       $171,362
         Standby letters of credit                    19,191         12,530
         Mortgages sold with recourse                383,301        186,881


   Commitments to extend credit are agreements to lend to a customer as long as
   there is no violation of any condition established in the contract.
   Commitments generally have fixed expiration dates or other termination
   clauses and may require payment of a fee.  Since many of the commitments are
   expected to expire without being fully drawn upon, the total commitment
   amounts disclosed above do not necessarily represent future cash
   requirements.

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

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

   The Bank's mortgage subsidiary, SCMC, sells mortgages in the secondary
   market.  A portion of these loans are sold with recourse for a period which
   generally does not exceed one year.

R. REGULATORY MATTERS

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

   To meet the capital adequacy requirements, the Company must maintain minimum
   capital amounts and ratios as defined in the regulations.  Management
   believes, as of December 31, 2000 and 1999, that the Company and the Bank met
   all capital adequacy requirements to which they are subject.

   As of December 31, 2000, the most recent notification categorized the 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.  To be

                                       54
<PAGE>

   categorized as well capitalized, the Bank must maintain minimum total risk-
   based, Tier I risk-based, and Tier I leverage ratios as set forth in the
   table:


<TABLE>
<CAPTION>
                                                                                                                   TO BE WELL
                                                                                                               CAPITALIZED UNDER
                                                                                      FOR CAPITAL              PROMPT CORRECTIVE
                                                              ACTUAL               ADEQUACY PURPOSES           ACTION PROVISIONS
                                                     ---------------------        -------------------         --------------------
                                                     AMOUNT          RATIO        AMOUNT        RATIO         AMOUNT         RATIO
                                                     ------          -----        ------        -----         ------         -----
    <S>                                              <C>            <C>            <C>           <C>          <C>            <C>
    As of December 31, 2000:
    Total Capital (to Risk Weighted Assets)         $195,326        11.51 %      $135,761       8.0 %
    Tier I Capital (to Risk Weighted Assets)         182,842        10.78 %        67,845       4.0 %
    Tier I Capital (to Average Assets)               182,842         9.39 %        77,888       4.0 %

    As of December 31, 1999:
    Total Capital (to Risk Weighted Assets)         $172,912        11.83 %      $116,931       8.0 %
    Tier I Capital (to Risk Weighted Assets)         159,636        10.92 %        58,475       4.0 %
    Tier I Capital (to Average Assets)               159,636         8.28 %        77,119       4.0 %

    STERLING BANK:
    As of December 31, 2000:
    Total Capital (to Risk Weighted Assets)         $181,934        10.73 %      $135,645       8.0 %       $169,556         10.0 %
    Tier I Capital (to Risk Weighted Assets)         169,450        10.00 %        67,780       4.0 %        101,670          6.0 %
    Tier I Capital (to Average Assets)               169,450         8.73 %        77,652       4.0 %         97,065          5.0 %

    As of December 31, 1999:
    Total Capital (to Risk Weighted Assets)         $151,768        10.41 %      $116,632       8.0 %       $145,791         10.0 %
    Tier I Capital (to Risk Weighted Assets)         138,581         9.51 %        58,289       4.0 %         87,433          6.0 %
    Tier I Capital (to Average Assets)               138,581         7.19 %        77,090       4.0 %         96,362          5.0 %

</TABLE>

   DIVIDEND RESTRICTIONS - Dividends paid by the Bank and the Company are
   subject to certain restrictions imposed by regulatory agencies.  Under these
   restrictions there was an aggregate of approximately $72.5 million and $51.4
   million available for payment of dividends at December 31, 2000, by the Bank
   and the Company, respectively.

S.  SEGMENTS

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

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

                                       55
<PAGE>

   Summarized financial information by operating segment for the years ended
   December 31, 2000 and 1999 follows:


<TABLE>
<CAPTION>
                                                     2000                                           1999
                                    -------------------------------------       -----------------------------------------
                                    COMMERCIAL   MORTGAGE                       COMMERCIAL         MORTGAGE
                                     BANKING     BANKING          TOTAL          BANKING           BANKING         TOTAL
                                    ----------  --------        ---------       ----------       -----------       ------
     <S>                            <C>           <C>            <C>             <C>               <C>              <C>
   Net interest income           $   98,321      $     -       $   98,321     $   88,489         $     -       $   88,489
   Noninterest income                17,771       21,796           39,567         15,683          13,585           29,268
                                 ----------      -------       ----------     ----------         -------       ----------
          Total revenue             116,092       21,796          137,888        104,172          13,585          117,757
   Provision for credit
    losses                            9,100            -            9,100          8,643               -            8,643
   Noninterest expense               73,218       16,709           89,927         66,985          11,041           78,026
                                 ----------      -------       ----------     ----------         -------       ----------
   Income before income
    taxes                            33,774        5,087           38,861         28,544           2,544           31,088
   Provision for income taxes        10,200        2,081           12,281          8,552           1,113            9,665
                                 ----------      -------       ----------     ----------         -------       ----------
          Net income             $   23,574      $ 3,006       $   26,580     $   19,992         $ 1,431       $   21,423
                                 ==========      =======       ==========     ==========         =======       ==========
   Total assets                  $1,920,327      $ 4,804       $1,925,131     $1,955,154         $ 4,326       $1,959,480
                                 ==========      =======       ==========     ==========         =======       ==========
</TABLE>

   Intersegment interest was paid to Sterling Bank by SCMC in the amount of $7.4
   million and $4.1 million for the years ended December 31, 2000 and 1999,
   respectively.  Total loans in the mortgage warehouse of $136.0 million and
   $70.4 million were eliminated in consolidation at December 31, 2000 and 1999,
   respectively.

T. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL STATEMENTS

   Fair values were estimated by management as of December 31, 2000 and 1999,
   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:

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

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

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

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

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

                                       56
<PAGE>

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

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

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


<TABLE>
<CAPTION>
                                                                                      DECEMBER 31,
                                                   --------------------------------------------------------------------------
                                                                  2000                                   1999
                                                   ----------------------------------      ----------------------------------
                                                     CARRYING            ESTIMATED           CARRYING             ESTIMATED
                                                      AMOUNT            FAIR VALUE            AMOUNT              FAIR VALUE
                                                   -----------         -------------       ------------         -------------
<S>                                                 <C>                   <C>                <C>                  <C>
Financial assets:
   Cash and short-term investments                $  146,277            $  146,277          $  132,108            $  132,108
   Available-for-sale securities                     200,254               200,254             359,127               359,127
   Held-to-maturity securities                        90,927                91,061             166,112               163,743
   Loans held for sale                               139,148               139,148              70,404                70,404
   Loans held for investment                       1,228,981             1,218,859           1,124,577             1,117,581
   Less allowance for credit losses                  (15,693)              (15,693)            (13,187)              (13,187)
                                                  ----------            ----------          ----------            ----------
Total                                             $1,789,894            $1,779,906          $1,839,141            $1,829,776
                                                  ==========            ==========          ==========            ==========
Financial liabilities:
   Deposits                                       $1,577,735            $1,578,140          $1,415,551            $1,415,888
   Other borrowed funds                              140,364               140,364             362,332               362,332
                                                  ----------            ----------          ----------            ----------
Total                                             $1,718,099            $1,718,504          $1,777,883            $1,778,220
                                                  ==========            ==========          ==========            ==========
Off-balance-sheet instruments:
   Commitments to extend credit                                          (   -   )                                 (   -   )
   Standby letters of credit                                             (   -   )                                 (   -   )
</TABLE>

                                       57
<PAGE>

U. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

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


<TABLE>
<CAPTION>



                                                      2000                                    1999
                                    ------------------------------------------ ---------------------------------------
                                        FOURTH    THIRD    SECOND     FIRST    FOURTH      THIRD     SECOND    FIRST
                                       QUARTER   QUARTER   QUARTER   QUARTER   QUARTER    QUARTER    QUARTER   QUARTER
                                    -----------  -------   -------  ---------  -------    --------  ---------  --------
<S>                                     <C>       <C>       <C>      <C>        <C>        <C>       <C>         <C>
Interest income                        $ 39,992  $40,514  $38,750    $37,174  $36,278    $31,112    $28,546    27,685
Interest expense                         14,749   15,710   14,253     13,397   12,082      8,729      7,085     7,236
                                       --------  -------  -------  ---------  -------   --------  ---------    ------
    Net interest income                  25,243   24,804   24,497     23,777   24,196     22,383     21,461    20,449
Provision for credit losses               2,721    2,206    2,149      2,024    2,929      1,928      2,088     1,698
                                       --------  -------  -------  ---------  -------   --------  ---------    ------
Net interest income after
    provision for credit losses          22,522   22,598   22,348     21,753   21,267     20,455     19,373    18,751
Noninterest income                       12,354   10,177    9,872      7,164    8,198      7,184      7,597     6,289
Noninterest expense                      24,455   22,746   22,431     20,295   20,482     19,251     20,459    17,834
                                       --------  -------  -------  ---------  -------   --------  ---------    ------
    Income before income taxes           10,421   10,029    9,789      8,622    8,983      8,388      6,511     7,206
Provision for income taxes                3,450    3,115    3,097      2,619    2,789      2,657      1,889     2,330
                                       --------  -------  -------  ---------  -------   --------  ---------    ------
    Net income                         $  6,971  $ 6,914  $ 6,692    $ 6,003  $ 6,194    $ 5,731    $ 4,622     4,876
                                       ========  =======  =======  =========  =======   ========  =========    ======
Earnings per share:
    Basic                              $   0.27  $  0.26    $0.26      $0.23    $0.24      $0.22      $0.18     $0.19
                                       ========  =======  =======  =========  =======   ========  =========    ======
    Diluted                            $   0.26  $  0.26    $0.25      $0.23    $0.23      $0.22      $0.18     $0.19
                                       ========  =======  =======  =========  =======   ========  =========    ======
Shares used in computing
    earnings per share:
    Basic                                26,207   26,177   26,135     26,057   26,014      25,920    25,720    25,770
                                       ========  =======  =======  =========  ========  =========  ========    ======
    Diluted                              26,762   26,629   26,459     26,368   26,438      26,442    26,271    26,303
                                       ========  =======  =======  =========  =======   =========  ========    ======

</TABLE>

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

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

V.   SUBSEQUENT EVENTS

   On March 1, 2001, Sterling Bancshares, Inc. announced that it has entered
   into a definitive merger agreement to acquire Houston based Lone Star
   Bancorporation, Inc., and its subsidiary bank, Loan Star Bank in a stock-for-
   stock merger.  The merger agreement provides that the shareholders of Lone
   Star Bancorporation, Inc. will receive an aggregate of 1,760,000 shares of
   common stock of Sterling for all of the outstanding common stock, assuming
   that all outstanding Lone Star stock options are exercised.  As of December
   31, 2000, Lone Star Bancorporation, Inc. had total assets of $152 million,
   loans of $117 million, and deposits of  $141 million.  The proposed merger is
   subject to customary closing conditions, including receipt of all requisite
   regulatory approval and the approval of Lone Star's shareholders and a
   determination that the transaction will qualify for pooling accounting
   treatment.

   In February 2001, the Company formed Sterling Bancshares Capital Trust II
   ("Trust II") and Sterling Bancshares Capital Trust III, each trust formed
   under the laws of the State of Delaware. Trust II issued $28,750,000 of 9.20%
   Trust Preferred Securities and invested the proceeds thereof in the 9.20%
   Junior Subordinated Deferrable Interest Debentures (the "Junior Subordinated
   Debentures") issued by the Company. The Junior Subordinated Debentures will
   mature on March 21, 2031, which date may be shortened to a date not earlier
   than March 21, 2006 if certain conditions are met (including the Company
   having

                                       58
<PAGE>

   received prior approval of the Federal Reserve and any other required
   regulatory approvals). The Trust Preferred Securities will be subject to
   mandatory redemption if the Junior Subordinated Debentures are repaid by the
   Company. The Junior Subordinated Debentures may be prepaid if certain events
   occur, including a change in the tax status or regulatory capital treatment
   of the Trust Preferred Securities. In each case, redemption will be made at
   par, plus the accrued and unpaid distributions thereon through the redemption
   date.

   On March 22, 2001, Sterling Bank, Inc. acquired CaminoReal Bancshares of
   Texas, Inc., based in San Antonio, Texas and its subsidiary bank, CaminoReal
   Bank, National Association.  CaminoReal Bancshares is privately held and is
   the bank holding company of CaminoReal, National Association, which operates
   four banking offices in San Antonio and four banking offices in the south
   Texas cities of Eagle Pass, Carrizo Springs, Crystal City and Pearsall. This
   acquisition will be accounted for using the purchase method of accounting.






                                      59
<PAGE>
<TABLE>
<CAPTION>

W. PARENT-ONLY FINANCIAL STATEMENTS

STERLING BANCSHARES, INC.
(PARENT COMPANY ONLY)

BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
(IN THOUSANDS)
------------------------------------------------------------------------------------------------------------------------------------

                                                                               DECEMBER 31,
                                                                  ---------------------------------------
                                                                         2000                 1999
                                                                  -----------------     -----------------
<S>                                                                  <C>                   <C>
ASSETS
Cash and cash equivalents                                           $       11,603        $       15,698
Accrued interest receivable and other assets                                 2,004                 4,408
Goodwill, net                                                                  555                   583
Investment in bank subsidiaries                                            173,937               142,728
Investment in Sterling Bancshares Capital Trust I                              889                   889
                                                                 ------------------     -----------------
TOTAL                                                               $      188,988        $      164,306
                                                                  =================     =================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
   Accrued interest payable and other liabilities                   $          215        $          124
   Notes payable                                                                 -                     -
   ESOP indebtedness                                                             -                     -
   Junior subordinated debentures                                           29,639                29,639
                                                                  -----------------     -----------------
                Total liabilities                                           29,854                29,763

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY:
   Preferred stock                                                              51                    89
   Common stock                                                             26,231                26,030
   Capital surplus                                                          29,537                28,658
   Retained earnings                                                       102,264                80,927
   ESOP indebtedness
   Accumulated other comprehensive income - net
      unrealized loss on available-for-sale securities, net of tax           1,051                (1,161)
                                                                  -----------------     -----------------
                                                                           159,134               134,543
                                                                  -----------------     -----------------
TOTAL                                                               $      188,988        $      164,306
                                                                  =================     =================
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

STERLING BANCSHARES, INC.
(PARENT COMPANY ONLY)

STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
------------------------------------------------------------------------------------------------------------------------------------

                                                           2000              1999              1998
                                                       ------------      ------------      ------------
<S>                                                    <C>               <C>              <C>
REVENUES:
  Dividends received from bank subsidiaries             $        -        $       33        $      861
    Interest Income                                              -                 -                 7
                                                       ------------      ------------      ------------
       Total revenues                                            -                33               868

EXPENSES:
  Interest expense:
    Notes payable and ESOP indebtedness                          -                68               175
    Junior subordinated debentures                           2,668             2,668             2,668
    Goodwill amortization                                       28                27                28
    General and administrative                                 990               733               758
                                                       ------------      ------------      ------------
       Total expenses                                        3,686             3,496             3,629

Income (deficit) before equity in undistributed
    earnings of subsidiaries and income taxes               (3,686)           (3,463)           (2,761)

Equity in undistributed earnings of
    subsidiaries                                            28,998            23,418            19,871
                                                       ------------      ------------      ------------

Income before income tax benefit                            25,312            19,955            17,110

Income tax benefit                                           1,268             1,468             1,195
                                                       ------------      ------------      ------------

Net income                                              $   26,580        $   21,423        $   18,305
                                                       ============      ============      ============

</TABLE>

                                      61

<PAGE>

STERLING BANCSHARES, INC.
(PARENT COMPANY ONLY)

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                            YEAR ENDED DECEMBER 31,
                                                                            ---------------------------------------------------
                                                                                  2000                 1999             1998
                                                                            ---------------------------------------------------
<S>                                                                          <C>                <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income                                                                   $ 26,580             $ 21,423         $ 18,305
    Adjustments to reconcile net income to net cash
       provided by operating activities:
       Amortization of goodwill                                                        28                   27               28
       Equity in undistributed earnings of subsidiary                             (28,998)             (23,418)         (19,871)
       Change in operating assets and liabilities:
          Accrued interest receivable and other assets                              2,404                 (323)          (1,336)
          Accrued interest payable and other liabilities                               92                 (314)          (2,727)
                                                                            --------------        --------------    -----------
                 Net cash provided by (used in) operating activities                  106               (2,605)          (5,601)

 CASH FLOWS FROM FINANCING ACTIVITIES:
    Repayments of notes payable                                                         -               (1,883)            (417)
    Proceeds from issuance of common stock                                          1,269                2,045            2,391
    Proceeds from issuance of preferred stock                                         385                   31            1,363
    Redemption of common stock                                                          -                    -              (22)
    Purchase of treasury stock                                                       (612)                   -                -
    Payments of cash dividends                                                     (5,243)              (4,511)          (4,105)
                                                                            --------------        --------------    -----------
                 Net cash provided by (used in) financing activities               (4,201)              (4,318)            (790)
                                                                            --------------        --------------    -----------

 NET INCREASE (DECREASE) IN CASH                                                   (4,095)              (6,923)          (6,391)

 CASH AND CASH EQUIVALENTS AT
     BEGINNING OF YEAR                                                             15,698               22,621           29,012
                                                                            --------------        --------------    -----------

 CASH AND CASH EQUIVALENTS AT END OF YEAR                                        $ 11,603             $ 15,698         $ 22,621
                                                                            ==============        ==============    ===========
</TABLE>

                                      62